3-36.

3-37.
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.

3-38.
 A1: gather more information
A2: do not gather more information
A3: build quadplex
A4: build duplex
A5: do nothing
EMV(node 2) = 0.9(12,000) + 0.1(–23,000) = 8,500
EMV(node 3) = 0.9(2,000) + 0.1(–13,000) = 500
EMV(get information and then do nothing) = –3,000
EMV(node 4) = 0.4(12,000) + 0.6(–23,000) = –9,000
EMV(node 5) = 0.4(2,000) + 0.6(–13,000) = –7,000
EMV(get information and then do nothing) = –3,000
EMV(node 1) = 0.5(8,500) + 0.5(-3,000) = 2,750
EMV(build quadplex) = 0.7(15,000) + 0.3(–20,000) = 4,500
EMV(build duplex) = 0.7(5,000) + 0.3(–10,000) = 500
EMV(do nothing) = 0
Decisions: do not gather information; build quadplex.