Let's say you own a small construction company. You need to decide whether to buy a bulldozer to add to your equipment fleet. You assume that the construction industry could be Good, Mediocre, or Bad, and associate a dollar value for your profits with each possible state of the economy. Your profits will also depend on whether you buy the equipment as follows:

*Buy the bulldozer and the economy is good should yield a profit of $120K.
*Buy the bulldozer and the economy is mediocre should yield a profit of $80 K.
*Buy the bulldozer and the economy is bad should yield a profit of -$50K. (That's negative!)
*Don't buy the bulldozer and the economy is good should yield a profit of $100K using your other equipment.
*Don't buy the bulldozer and the economy is mediocre should yield a profit of $75K using your other equipment.
*Don't buy the bulldozer and the economy is bad should yield a profit of $60K using your other equipment.
*The probability that there is a "good" economy is 20%.
*The probability that there is a "mediocre" economy is 55%.
*The probability that there is a "bad" economy is 25%.
a. Draw the decision tree.
b. What is the EMV associated with the decision to buy the bulldozer?
c. What is the EMV associated with the decision not to buy the bulldozer?
d. What is the best decision?

Transcribed Image Text:

Economy Mediocre Good Poor EMV Bulldozer\Prob Buy Don't buy 0.2 0.55 0.25 -50 55.5 120 80 100 75 60 76.25