Jessica is thinking of her career option after graduating with a bachelor degree. She already got a job offer from Iron Rice-container Company, and also got admitted to Ph. D. program. The Iron Rice-container Company offered her an annual salary of $50,000. If she decided to go to Ph. D. program, she has a 70% of chance of being successful in Ph. D. There would be no cost for completing Ph. D. if she succeeded. If she succeeded in Ph. D., there is a 40% chance her research will match with her skills and interests, in which her expected salary will be $160,000, and a 60% chance that her research will not match with her skills and interest, where her expected salary will be $90,000. In the event of her success in Ph. D., she will have to decide whether she should get a job in academic area or industrial area. If she gets a job in academic area, her salary will be 5% more than the expected salary ($160,000*1.05 in the case where her research matches with her skills, and $90,000*1.05 in the case where her research does not match with her skills). Her expected salary when she gets a job in industrial area primary depends on two market conditions:. Market Conditions Good Bad Premium percentages 50% -30% Probability 0.4 0.6
Suppose her decision is only dependent on her first annual salary minus corresponding cost (if exists) when she will get a job; that is, you ignore the opportunity cost of getting a job at Iron-Rice-container Company if she decided to go to Ph. D. (which takes five years); and ignore time-value of money.
a) What decision she should make for maximizing her annual salary? Answer using decision tree approach.
b) Determine the Expected Value of Perfect Information (EVPI) for the conditions of her succeeded or failed in Ph. D. course. Answer this question with a decision tree.