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Mr Peter, the manager of the commercial loan department of a bank, must decide on allocation of loans. He can choose strategy A, B or
Mr Peter, the manager of the commercial loan department of a bank, must decide on allocation of loans. He can choose strategy A, B or not to provide any loan. The Protit (RM) from each alternative depends on the economic conditions as given in the following table: Decision State of nature Good Poor Economy Economy(RM) (RM) 265,000 30,000 400,000 -50,000 0 0 Strategy Al Strategy B No loan Mr Peter estimates the probability of a good economy without performing a survey is 0.5. As he still uncomfortable with his personal assessment, he would like to hire an economist to survey the future economic condition. This will cost the bank RM8,000. Furthermore, the probability of a positive result from market survey is 0.6 and there is a 70% chance that the economy will be good given a positive result. However, if the survey result is negative, the chance of a good economy will be reduced to 30%. a. Draw a tree to illustrate the problem. Calculate all the expected monetary values and make a recommendation to Mr Peter b. What is the maximum amount that Mr Peter would pay for the survey
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