ILLUSTRATION
Let us illustrate a decision tree with an example.
A manufacturer of toys is interested to know whether he should launch a deluxe model or a popular model of a toy. If the deluxe model is launched, the probabilities that the market will be good, fair or poor are given by 0.4, 0.3 and 0.3 respectively with payoffs of Rs. 1,80,000, Rs. 100,000 and Rs. –20,000 respectively. If the popular model is introduced, the corresponding probabilities are given by 0.3, 0.4 and 0.3 with respective payoffs of Rs. 2,00,000, Rs. 1,50,000 and Rs. –20,000. The problem is to decide which model should be launched.
The decision tree for the given is drawn below:
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