Analyze the following decision tree.After determining the missing probabilities,identify which alternative (Option 1 or Options 2)has the higher expected payoff.What is the expected payoff?

Question

Quizplus · Accepted Answer

To determine the expected payoff for each option, we must multiply the payoff by the probability of each outcome and add them up.

For Option 1: 
Expected Payoff = (0.2)(20) + (0.4)(25) + (0.4)(30) = $25

For Option 2: 
Expected Payoff = (0.3)(10) + (0.4)(25) + (0.3)(50) = $27.50

Therefore, Option 2 has a higher expected payoff, so the best choice is Option 2.

Analyze the Following Decision Tree