Choosing Between Alternatives: Construction Of Decision Tree

Question

Emaar is a real estate company based in Dubai and is considering for constructing three kinds of housing complexes. The three kinds of complexes are: small complex, medium complex and large complex. When asked about the possible demand for the houses, the president of the Emaar Company acknowledged a wide range of possibilities but decided that it would be adequate to consider only two possible chance event outcomes: a strong demand and a weak demand.

The probabilities for the two states of nature are 0.8 for a strong demand and 0.2 for a weak demand. The payoff table with profits expressed in millions of Dirhams is shown in the table below. Use the information below relating to the above table and answer the questions that follows:

 ALTERNATIVE Strong demand (Dirham) Weak Demand (Dirham) Small complex 7 7 Medium complex 12 5 Large complex 20 -8 Probability 0.8 0.2

(a)          Construct a decision tree to help analyze this problem (without solving).

(b)          Solve the problem using EMV. What advice would you give?

Summary

The question belongs to Finance and it discusses about a real estate company considering constructing 3 kinds of housing complexes. A decision tree has been constructed and the problems arising from EMV have been given.

Total Word Count 59

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