Question

Part I:

A group of Ophthalmologists are considering opening a private eye center in downtown Vancouver, offering special corrective eye surgery to the general public. The eye surgeons believe that their success of opening such a facility is largely dependent on the provincial governments’ position to grant or not grant further public access to private health care facilities. If the provincial government supports future public access to private health care facilities, the surgeons believe that a clinic would have a “great” market opportunity. Likewise, if the government provides some access or restricts future access, the surgeons believe this would create “fair market” and “awful market” conditions respectively. Currently, the eye surgeons estimate the 3 market conditions as a function of government policy as of follows: P(“Great Market”) = 0.30; P(“Fair Market”) = 0.40; P(“Awful Market”)=0.30. The eye surgeons estimate that each patient treated will provide a unit profit margin (averaged across their various services) of $300 and the number of patients treated under the 3 market conditions in their first year of operation is 600, 300 and 25 respectively. The surgeons’ initial start-up costs is estimated at $100,000 for opening the clinic. Of course, they do not need to proceed at all, in which case there is no cost.

1. Draw a decision tree by hand and solve it using the EMV decision criterion to help analyze their problem considering their first year of potential operation. According to the EMV decision criterion, what the eye surgeons do?
2. Develop a risk profile for the eye surgeons for the decision associated with opening the clinic.

Part II:

The eye surgeons have been approached by Madeye Inc., a research firm that specializes in health care studies, that offers to perform a survey of the market conditions for a fee of $10,000. According to previous health care studies of a similar nature, the researcher claims that their experience enables them to make the following statements regarding the likelihood of the survey market results, given the 3 market conditions identified by the surgeons:

Likelihood of survey market results, given the various market conditions:

Great Fair             Awful

Positive Survey Test Results        0.91       0.39            0.15

Negative Survey Test Results      0.09       0.61             0.85

Develop a second decision tree for the eye surgeons to reflect the option of hiring the research firm. Draw this decision tree and evaluate it using the EMV decision criterion. Use the same cash flows provided in Part I.

Answer 1

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