Your company has placed a bit for a contract with a major airconditioning manufacturer, but the decision will not be made forfour months. It cost the manufacturer $10,000 to prepare and submitthe bid. The possible states of nature and their probabilities ofoccurring are as follows: (1) Receive the full contract (30%), (2)Receive a partial contract (20%), or (3) No contract (50%). ideallyyou would like to be up and running when the contract decision ismade, but in order to do that any parts or machinery that will berequired for the completion of the contract must be ordered rightaway. Use the information in this problem and the blank decisiontree to answer the questions.
Payoff Table | Possible Outcomes ($1,000) | |
| Full Contract | Partial Contract | No Contract | |
Full Retooling | 850 | 400 | ?350 | |
Partial Retooling | 550 | 350 | ?150 | |
No Retooling | ?300 | ?150 | 0 | |
*In the payoff table, a negative number (?) indicates loss. |
Use the information in this problem and the blank decision treeon the next page to answer the questions.
Questions | Answers |
a. | What should you decide to do? | |
b. | What is the EMV for this problem? | |
Decision Tree for Problem 4 |
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