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Etobicoke Development Corporation EDC purchased land not far from the intersection of Dundas Street West and Kipling Avenue. The top managers of EDC , however,

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Etobicoke Development Corporation EDC purchased land not far from the intersection of Dundas Street West and Kipling Avenue. The top managers of EDC , however, have different opinions on how this land can be used. Eventually, EDC commissioned preliminary architectural drawings for three different projects: High-Rise Condos; Low-Rise Condos; Townhouse Complex. Also, it is recognized that the financial success of the project depends on the situation on the real estate market, Strong Demand or Weak Demand.The EDC expectations are summarized in the following table (payoffs are in $$millions).

Decision Alternatives

States of Nature

Strong Demand

Weak Demand

High-Rise Condos

27

-12

Low-Rise Condos

176

Townhouse Complex

1210

Originally, EDC specialists counted on a 0.63 probability of strong demand.

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Simple Decision Tree Part (a) Suppose that you need to construct a simple decision tree that shows the logical sequence of the decision problem. Select the correct sketch of the decision tree based on the information above. Note that P(S)=probability of strong demand, P(W)=probability of weak demand. Also, we use the following notations: P1=Payoff 1, P2=Payoff 2 , P3=Payoff 3 , P4=Payoff 4 , P5=Payoff 5, P6=Payoff 6. OP(S) = 0.63 , P(W) = 0, P1 = 27 , P2 = - 12, P3 = 17, PA = 6, P5 = 12, P6 = 10 High-Rise Condos High-Rise Condos Payoff 1 Payoff 4 P(S) P(W) Low-Rise Condos Weak Low-Rise Condos Strong C O O Payoff 2 Payoff 5 Townhouse Complex Townhouse Complex Payoff 3 Payoff 6OP(S) = 0.37 , P(W) = 0.63, P1 = 27 , P2 = 17 , P3 = 12, PA = - 12, P5 = 6, P6 = 10 P(S) Strong High-Rise Condos Payoff 1 P(W) Weak Payoff 2 P(S) Strong Low-Rise Condos Payoff 3 O P(W) Weak Payoff 4 P(S) Strong Payoff 5 Townhouse Complex P(W) Weak Payoff 6OP(S) = 0.63 , P(W) = 0.37, P1 = 27 , P2 = - 12, P3 = 17, PA = 6, P5 = 12, P6 = 10 P(S) Strong Payoff 1 High-Rise Condos P(W) Weak Payoff 2 P(S) Strong Low-Rise Condos Payoff 3 O P (W ) Weak Payoff 4 P(S) Strong Payoff 5 Townhouse Complex C P(W) Weak\f0 None of the above. (b) Using the sketch from the previous question and TreePIan, construct a simple decision tree. Based on the simple decision tree answer the following questions. Keep 2 decimal places in the EMV answers. . Find the expected monetary value for High-Rise Condos decision. . Find the expected monetary value for Low-Rise Condos decision. . Find the expected monetary value for Townhouse Complex decision. EM V(T0wnhouse Complex) 2 S (c) Using the simple decision tree determine the best decision policy. 0 Go ahead with Low-Rise Condos project if the demand is strong. 0 Construct High-Rise Condos if the demand is strong. 0 Support Townhouse Complex project. 0 Construct High-Rise Condos. O Support Townhouse Complex project if the demand is strong. O Go ahead with Low-Rise Condos project. O None of the above. (d) Suppose that you need to construct a revised decision tree. First, fill in the following revised probability tables for the favorable and unfavorable reports. Round joint probability values, P(Favorable), P(Unfavorable), and the posterior probability values to 4 decimals places. Probability Revisions given a Favorable Report State Conditional Probability Posterior Probability Prior of Probability P(Fav. /State of Nature) Joint Probability P(State of Nature/ Fav.) Nature Strong 0.63 Weak 0.37 P(Favorable) = 1.0000Probability Revisions given an Unfavorable Report State Prior Conditional Probability Posterior Probability of Joint Probability Probability |P(Unfav. /State of Nature) P(State of Nature/ Unfav.) Nature Strong 0.63 Weak 0.37 P( Unfavorable) = 1.0000(e) Using the revised probability tables, please identify the revised/posterior probabilities which you are going to use in the revised decision tree: Keep 4 decimal places in the following answers. P ( Strong demand | Favorable report) : P ( Weak demand | Favorable report) = :J P ( Strong demad | Unfavorable report) 2 :1 P ( Weak demand | Unfavorable report) 2

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