Use the following information to answer the next six questions

1. Use the following information to answer the next six questions.  (To answer these questions, you will want to construct a decision tree showing Monica's options and payouts and probabilities.}

Monica wants to begin a toy sailboat business and because of the expense involved in developing molds and acquiring the necessary equipment, wants to conduct a market study to see if the market is adequate to support her business.   The study will cost $10,000 and can be either favorable or unfavorable.   Her basic decision is to build a small or large shop or no shop at all.   Expected profits are shown in the table below.   Monica estimates that the probability of a favorable market given a favorable market study is 0.8.   The probability of an unfavorable market given an unfavorable market study is estimated to be 0.9.   (Thus, the probability of an unfavorable market given a favorable market study is 0.2 and the probability of a favorable market given an unfavorable market study is 0.1.)   Monica feels that there is a 50-50 chance that the market study will be favorable.   Of course, Monica could bypass the market study and simply make the decision.   If she did no study, she estimates that the probability of a favorable market is 0.6.   Monica's expected profits are shown in the following table:

Expected Profits	Market
Shop Size	Favorable	Unfavorable
Large Shop	$90,000	-$30,000
Small Shop	$60,000	-$20,000

If Monica chose not to conduct the market study, what would be the expected value of building a large shop?

1 points   

QUESTION 16

1. If Monica chose to conduct the market study and the study predicted a favorable market, what option should she choose?

Large shop

Small shop

No shop

1 points   

QUESTION 17

1. If Monica chose to conduct the market study and the study predicted an unfavorable market, what option should she choose?

Large shop

Small shop

No shop

1 points   

QUESTION 18

1. What is the expected value for Monica if she conducted the market study?

1 points   

QUESTION 19

1. What is the expected value for Monica if she does not conduct the market study?

1 points   

QUESTION 20

1. Which of the following is the optimal decision strategy for Monica?

1. Conduct the market study; 2.  If favorable, build a large shop.  If unfavorable, build no shop.

1. Conduct the market study; 2.  If favorable, build a small shop.  If unfavorable, build no shop.

1. Conduct the market study; 2.  If favorable, build a large shop.  If unfavorable, build a small shop.

1. Do not conduct market study; 2.  Build a large shop.