3-28 A group of medical professionals is considering the construction of a private

clinic. If the medical demand is high (i.e., there is a favorable market for the

clinic), the physicians could realize a net profit of $100,000. If the market is not

favorable, they could lose $40,000. Of course, they don't have to proceed at all,

in which case there is no cost. In the absence of any market data, the best the

physicians can guess is that there is a 50-50 chance the clinic will be successful.

Construct a decision tree to help analyze this problem. What should the medical

professionals do?

3-40 In Problem 3-28, you helped the medical professionals analyze their

decision using expected monetary value as the decision criterion. This group has

also assessed their utility for money:

U( -

$45,000) = 0,

U(

-$40,000) = 0.1,

U(

-

$5,000) = 0.7,

U($O)

= 0.9,

U($95,000)

= 0.99, and

U($100,000)

= 1. Use

expected utility as the decision criterion, and determine the best decision for the

medical professionals. Are the medical professionals risk seekers or risk

avoiders?