Varicella (chicken pox) is the most common vaccine preventable disease in California prisons. Many prison inmates have not received the varicella vaccination. This is especially true for prisoners born abroad or before 1980. The state of California is considering if it should institute a prevention program in one of its larger, more crowded institutions in order to prevent an outbreak. Based on studies of varicella cases among prison populations there is a 7% chance of a varicella outbreak in the short term without a prevention program. If the prison institutes a prevention program, there is a 5% chance of a varicella outbreak. The cost of the program is $200,000. The costs to treat each case of varicella (medical plus cost to guard isolated inmates) is $20,000 per patient. Without a prevention program, it is estimated that if there is an outbreak, 200 inmates will get the disease. With a prevention program, it is estimated that 90 inmates will get the disease if there is an outbreak.
Set up the decision tree confronted by the decision maker. Label all axes, include the appropriate nodes, and payoffs. Assuming the decision maker is risk neutral, what decision should they choose? AND ALSO Assume the decision maker is terribly risk averse, what decision should they choose? Why?