3.

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a. EMV(node 2) = (0.9)(55,000) + (0.1)(–$45,000) = 49,500 - 4,500 = $45,000

EMV(node 3) = (0.9)(25,000) + (0.1)(–15,000) = 22,500 - 1,500 =$21,000

EMV(node 4) = (0.12)(55,000) + (0.88)(–45,000) = 6,600 - 39,600 = –$33,000

EMV(node 5) = (0.12)(25,000) + (0.88)(–15,000) = 3,000 - 13,200 = –$10,200

EMV(node 6) = (0.5)(60,000) + (0.5)(–40,000) = 30,000 - 20,000 = $10,000

EMV(node 7) = (0.5)(30,000) + (0.5)(–10,000) = 15,000 - 5,000 = $10,000

EMV(node 1) = (0.6)(45,000) + (0.4)(–5,000) = 27,000 - 2,000 = $25,000

Since EMV(market survey) > EMV(no survey), Jerry should conduct the survey. Since EMV(large shop | favorable
survey) is larger than both EMV(small shop | favorable survey) and EMV(no shop | favorable survey), Jerry should
build a large shop if the survey is favorable. If the survey is unfavorable, Jerry should build nothing since EMV(no
shop | unfavorable survey) is larger than both EMV(large shop | unfavorable survey) and EMV(small shop |
unfavorable survey).

b) If no survey, EMV = 0.5(30,000) + 0.5(–10,000) = $10,000. To keep Jerry from changing decisions, the following
must be true: EMV(survey) ≥ EMV(no survey) Let P probability of a favorable survey. Then, P[EMV(favorable
survey)] (1 - P) [EMV(unfavorable survey)] ≥ EMV(no survey)

This becomes: P(45,000) (1 - P)(–5,000) ≥ $10,000 Solving gives 45,000P + 5,000 - 5,000P ≥ 10,000

50,000P ≥ 15,000

 P ≥ 0.3

Thus, the probability of a favorable survey could be as low as 0.3. Since the marketing professor estimated the
probability at 0.6, the value can decrease by 0.3 without causing Jerry to change his decision. Jerry’s decision is
not very sensitive to this probability value.