Question 5.

The owners of a bar must decide whether or not to expand their bar. They think that the probability is

0.76 that the expansion will prove successful and 0.24 that it will not be successful. If it is successful,

they will gain $400,000. If it is not successful, they will lose $200,000.

a) Construct the decision tree for this problem, and use it to solve the problem, assuming that the owners

are risk neutral. [5]

b) How would the bar owners' decision be altered if they felt the probability of success were 0.24? [3]

c) What value of the probability "p"that the expansion is successful will make the bar owners

indifferent between expanding and not expanding the bar? Round your answer to 2 decimal

places. [4]