Consider the decision tree'below. You are at the starting decision node DO (shown in the orange color). Assume all paths and decisions occur within a 1-year time horizon, so that no discounting is necessary. There are dollar investments, as shown, required at decision nodes D1 and D2. Which of the letters (shown the red color) represents the optimal path maximizing the expected outcome value? Value, $ 30 0.9 D3 0.4 Investment 100 $-50 0.1 0.6 50 DI S-80 500 90 0.1 D1 500 $-80 90 Value $ 0.3 150 $-25 0.3 -30 0.4 75 0.5 200 D2$-30- 0.5 -100 $-35 50 O a. A O b. B O c. C O d. D O e. E O f. F

The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature. Decision Alternative d₁ d₂ = EV(d₁) EV(d₂) The optimal decision is ? States of Nature $1 $2 230 80 $3 80 5 Suppose that the decision maker obtained the probabilities P(S₁) = 0.65, P(S₂) = 0.15, and P(S3) = 0.20. Use the expected value approach to determine the optimal decision. 80 55

9. The East Chester Tribune must decide whether to publish a Sunday edition. The publisher thinks the probability is 0.6 that a Sunday edition would be a success and 0.4 that it would be a failure. If it is a success, she will gain $100,000. If it is a failure, she will lose $80,000. a. Construct a decision tree corresponding to the problem, and use backward induction to solve the problem. (Assume that the publisher is risk-neutral.) b. List all forks in the decision tree you constructed; then indicate whether each is a decision fork or a chance fork and state why.

Consider a buying firm and a supplier negotiating terms for a contract.  Suppose the Marginal Benefit to the buying firm of additional contract provisions in a contract (x) to the firm is: MB = 20,000 – 400x. Suppose the Marginal Cost to the buying firm of additional contract provision to the firm is: MC = 100x. What is the optimal number of contract provisions? Reconsider the previous question. If the maximum value (or price) of the contract that the buying firm is willing to pay for is $3,000, what would you expect the firm to do? a) Use the spot market b) Vertically integrate c) Continue to contract d) engage in holdup

A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the “shell” will cost $152,500 and is expected to have a $50,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for only $16,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $9,000 per year. If the company’s MARR is 13% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options.   The future worth when purchased is $     The future worth when leased is $