Sheet name: Decision Tree You need to decide to Produce a certain product or Not produce...
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Sheet name: Decision Tree You need to decide to Produce a certain product or Not produce it. The product can be a Success or a Failure; profit is 100, loss is 200 (in thousands of Euro) in those situations. You also need to decide whether to seek the advice of an external expert on your product or not; their advice is either Favorable, with a probability of 70%, or Unfavorable. An estimation of the chances of success are the following: 30% if you produce following unfavorable advice, 80% for production when advice is favorable. If you seek no advice, your instinct tells you you have 40% chance of failing if you start production. a) Draw the tree (4 points) Then, answer the following questions: b) If you decide not to seek expert's advice, would you produce or not? Why? (2 points) c) If you seek the expert's advice and his advice is Favorable, would you produce or not? Why? (2 points) d) If you have to pay for the expert's advice, what is the maximum you would pay - in other words: what is the Expected) V(alue) of seeking advice? (2 points) Sheet name: Decision Tree You need to decide to Produce a certain product or Not produce it. The product can be a Success or a Failure; profit is 100, loss is 200 (in thousands of Euro) in those situations. You also need to decide whether to seek the advice of an external expert on your product or not; their advice is either Favorable, with a probability of 70%, or Unfavorable. An estimation of the chances of success are the following: 30% if you produce following unfavorable advice, 80% for production when advice is favorable. If you seek no advice, your instinct tells you you have 40% chance of failing if you start production. a) Draw the tree (4 points) Then, answer the following questions: b) If you decide not to seek expert's advice, would you produce or not? Why? (2 points) c) If you seek the expert's advice and his advice is Favorable, would you produce or not? Why? (2 points) d) If you have to pay for the expert's advice, what is the maximum you would pay - in other words: what is the Expected) V(alue) of seeking advice? (2 points)
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