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Consider a situation in which there are three possible states of nature: good economy; bad economy; and neutral economy with probabilities p, q, and 1pq,
Consider a situation in which there are three possible states of nature: good economy; bad economy; and neutral economy with probabilities p, q, and 1pq, respectively. Ms. Ling is trying to decide whether to invest in a business. If she invests, she believes she will get a prot of $8million if the economy is good. However, since this is a rather risky business, she believes she will lose $4 million if the economy is neutral. Instead of investing in the new business, she could also loan the money to her niece, who has promised to pay her back with a prot of $3 million regardless of whether the economy is good or neutral. If the economy is bad, Ms. Ling believes that she will lose the same amount of money, $X million, regardless of whether she invests it in a business or loans it to her niece. However, she is not sure exactly how much money she will lose in this case (That is she does not know the exact value of X). Draw a decision tree 8: calculate the expected value of each decision
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