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hat should Cheryl do to maximize her expected​ payoff? Part 3 Choose the correct decision tree below. Note that all payoffs are in​ $1,000s.

hat should Cheryl do to maximize her expected​ payoff? Part 3 Choose the correct decision tree below. Note that all payoffs are in​ $1,000s.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Cheryl Druehl​ Retailers, Inc., must decide whether to build a small or a large facility at a new location in Fairfax. Demand at the location will either be low or​ high, with probabilities
0.3
and
0.7​,
respectively. If Cheryl builds a small facility and demand proves to be​ high, she then has the option of expanding the facility. If a small facility is built and demand proves to be​ high, and then the retailer expands the​ facility, the payoff is
​$290,000.
If a small facility is built and demand proves to be​ high, but Cheryl then decides not to expand the​ facility, the payoff is
​$253,000.
 
If a small facility is built and demand proves to be​ low, then there is no option to expand and the payoff is
​$220,000.
If a large facility is built and demand proves to be​ low, Cheryl then has the option of stimulating demand through local advertising. If she does not exercise this​ option, then the payoff is
​$45,000.
If she does exercise the advertising​ option, then the response to advertising will either be modest or​ sizable, with probabilities of
0.6
and
0.4​,
respectively. If the response is​ modest, the payoff is
​$50,000.
If it is​ sizable, the payoff is
​$220,000.
​Finally, if a large facility is built and demand proves to be​ high, then no advertising is needed and the payoff is
​$500,000.
Part 2
​a) What should Cheryl do to maximize her expected​ payoff?
Part 3
Choose the correct decision tree below. Note that all payoffs are in​ $1,000s.
 
 
- 220 Q - 220 Q low (0.7) low (0.3) expand expand 2 290 2 290 small high (0.3 large high (0.7 don't expand 253 don't expand 253 modest (0.4) 50 modest (0.6) 50 sizable -220 (0.8) sizable 220 (0.4) advertise advertise large low (0.3) small low (0.3) 45 45 3 don't advertise 3 don't advertise high (0.7) high (0.7) - 500 500
Transcribed Image Text:- 220 Q - 220 Q low (0.7) low (0.3) expand expand 2 290 2 290 small high (0.3 large high (0.7 don't expand 253 don't expand 253 modest (0.4) 50 modest (0.6) 50 sizable -220 (0.8) sizable 220 (0.4) advertise advertise large low (0.3) small low (0.3) 45 45 3 don't advertise 3 don't advertise high (0.7) high (0.7) - 500 500
220 Q 220 Q low (0.3) low (0.3) expand expand 2 290 2 290 small small high (0.7) high (0.7) don't expand don't expand 253 253 modest (0.6) 50 modest (0.6) 50 advertise sizable sizable 220 advertise (0.4 220 (0.4) large „low (0.3) large low (0.3) 45 3 don't advertise 45 3 don't advertise high (0.7) high (0.7) - 500 500 Cheryl should build the facility. If demand proves to be low, then V to stimulate demand. b) What is the value of this expected payoff? The expected payoff is S (round your response to the nearest dollar).
Transcribed Image Text:220 Q 220 Q low (0.3) low (0.3) expand expand 2 290 2 290 small small high (0.7) high (0.7) don't expand don't expand 253 253 modest (0.6) 50 modest (0.6) 50 advertise sizable sizable 220 advertise (0.4 220 (0.4) large „low (0.3) large low (0.3) 45 3 don't advertise 45 3 don't advertise high (0.7) high (0.7) - 500 500 Cheryl should build the facility. If demand proves to be low, then V to stimulate demand. b) What is the value of this expected payoff? The expected payoff is S (round your response to the nearest dollar).
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