Mark M.upp has jut been fired as the university bookstore manager for seyting prices too low (only 20 percent above suggest retail). He is considering ipenibg a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible wites under construction. One is relativley small, while the other is large. If he opens at Site 1 and demand is good, he will generqte a profit of $200,000. If demand is low he will lose $180,000. If he opens at Site 2and demand is high, he will generate a profut of $100,000, but he will lose $20,000 if demand is low. He also has the option of not opening either. He believes there is a 50 percent chnace that demand will be high. Mark can putchse a market research from Brooklyn College. The survey costs $10,000. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable stufy is 0.3. There is a 45 percent chnace that the study will be favorable. Draw a decision tree to determine the following:
a) what should Mark’s decisions be?
b) what is the macimum amount Mark should be willing to pay for this stufy?
c) What is the efficiency of the study?
Hint: the revised probabilities have already been calculated for you.