A company wants to build a plant but is considering the size. The table below shows...

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A company wants to build a plant but is considering the size.The table below shows their payoffs under different states ofdemand.
Demand
Low (p=0.45) High (p=0.55)
Small Plant 500000 500000
Medium Plant 200000 800000
Large Plant -200000 1000000
They can hire a consultant who can conduct a survey to evaluatedemand. The consultant will report to the company whether demand isstrong or weak. The probabilities are 0.60 and 0.40 for strong andweak survey results respectively. The conditional probabilities fordemand given survey results are as follow:
P(Low/Strong) = 0.35; P(High/Strong) = 0.65;
P(Low/Weak) = 0.70; P(High/Weak) = 0.30;
a) Draw the decision tree for this problem including with andwithout a survey.
b) What is the best decision without a survey?
c) What is the decision strategy when survey is conducted?
d) What is the EVPI?
e) What is the EVII

Answer & Explanation Solved by verified expert

4.4 Ratings (779 Votes)

a the decision tree is belowMoving from the right to leftwhen the prediction is strong resultchoice node 6 small plantThe expected value ischoice node 7 medium plantThe expected value ischoice node 8 Large plantThe expected value iswhen the prediction is weak resultchoice node 9 small plantThe expected value ischoice node 10 medium plantThe expected value ischoice node 11 Large plantThe expected See Answer

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	Demand
	Low (p=0.45)	High (p=0.55)
Small Plant	500000	500000
Medium Plant	200000	800000
Large Plant	-200000	1000000