If you examine the decision tree in Figure 9.12 (or any other decision trees from PrecisionTree), you will see two numbers (in blue font) to the right of each end node. The bottom number is the combined monetary value from following the corresponding path through the tree. The top number is the probability that this path will be followed, given that the best strategy is used. With this in mind, explain (1) how the positive probabilities following the end nodes are calculated, (2) why some of the probabilities following the end nodes are 0, and (3) why the sum of the probabilities following the end nodes is necessarily 1.
If you examine the decision tree in Figure 9.12 (or any other decision trees from PrecisionTree), you will see two numbers (in blue font) to the right of each end node. The bottom number is the combined monetary value from following the corresponding path through the tree. The top number is the probability that this path will be followed, given that the best strategy is used. With this in mind, explain (1) how the positive probabilities following the end nodes are calculated, (2) why some of the probabilities following the end nodes are 0, and (3) why the sum of the probabilities following the end nodes is necessarily 1.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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. If you examine the decision tree in Figure 9.12 (or
any other decision trees from PrecisionTree), you will
see two numbers (in blue font) to the right of each end
node. The bottom number is the combined monetary
value from following the corresponding path through
the tree. The top number is the probability that this
path will be followed, given that the best strategy is
used. With this in mind, explain (1) how the positive
probabilities following the end nodes are calculated,
(2) why some of the probabilities following the end
nodes are 0, and (3) why the sum of the probabilities
following the end nodes is necessarily 1.
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