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Below is a decision tree that assists with deciding whether a company should build a big plant or a small plant. The decision variables are
Below is a decision tree that assists with deciding whether a company should build a big plant or a small plant. The decision variables are the Big Plant or Small Plant decision. The states of nature (also called chance nodes, or chances) have to do with the expected strength of the economy and are uncontrollable (as all states of nature are). The economy is expected to be strong or weak, with probabilies of 70% and 30% respectively. The payoff of each decision alternative under each state of nature is at the end of each tree branch. For example, the payoff of a Big Plant in a strong economy is $100 million. The payoff of a small plant in a weak economy is $30 million. The best decision is determined by calculating the total expected monetary value of the pairs of branches at the end of each decision alternative path. The formula for the big plant expected monetary value is EMV(Big Plant) = (Probabilly Strong Econony)' Payoff Big Piant in Strong Economy + (Probability Weak Economy)'Payoff Big Plant in a Weak Economy. What is the expected monetary value of the Big Plant decision? What is the expected value of the small plant decision? Which expected value is biggest, representing the preferred decision
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