SOLVED PROBLEMS

Problem 12.1

A businessman has two independent investments A and B available to him but he lacks the capital to undertake both of them simultaneously. He can choose to take A first and then stop, or if A is successful then take B, or vice versa. The probability of success on A is 0.7, while for B it is 0.4. Both investments require an initial capital outlay of Rs. 2,000, and both return nothing if the venture is unsuccessful. Successful completion of A will return Rs. 3,000 (over cost), and successful completion of B will return Rs 5,000 (over cost). Draw the decision tree and determine the best strategy.

Solution

The required decision tree is as shown below:

There are three decision points in this tree. These are indicated as ...

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