Jerry Smith is thinking about opening a bicycle shop in his hometown. Jerry can open a small shop, a large shop, or no shop at all. The profits will depend on the size of the shop and whether the market is favorable or unfavorable for his products. Jerry is also thinking about hiring his old marketing professor to conduct a marketing research study. If the study is conducted, the study could be favorable (i. e., predicting a favorable market) or unfavorable (i. e., predicting an unfavorable market).

Jerry has done some analysis about the profitability of the bicycle shop. If Jerry builds the large bicycle shop, he will earn $60,000 if the market is favorable, but he will lose $40,000 if the market is unfavorable. The small shop will return a $30,000 profit in a favorable market and a $10,000 loss in an unfavorable market. At the present time, he believes that there is a 50-50 chance that the market will be favorable. His old marketing professor will charge him $5,000 for the marketing research. It is estimated that there is a 0.6 probability that the survey will be favorable and 0.4 probability that the survey will be unfavorable. Furthermore, there is a 0.9 probability that the market will be favorable given a favorable outcome from the study and a 0.1 probability of an unfavorable market. However, the marketing professor has warned Jerry that there is only a probability of 0.12 of a favorable market if the marketing research results are not favorable and a 0.88 probability of unfavorable market.

a) Develop a decision tree for Jerry using the worksheet.

b) Should Jerry use the marketing research?

c) How much is the market research worth?