a.) Draw a decision tree. b.) Determine the expected payoff for each decision and event node. c.) Whichalternative–buildingasmallfacilityorbuildingalargefacility–hasthe higher expected payoff?
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A store owner must decide whether to build a small or a large facility at a new location. Demand at a location can be either small or large, which probabilities estimated to be 0.4 and 0.6, respectively. If small facility is built and demand proves to be high, the manager may choose not to expand (payoff=P235,000) or to expand (payoff=P275,000). If a small facility is built and demand is low, there is no reason to expand and the payoff is P220,000. If a large facility is built and demand proves to be low, the choice is to do nothing (P60,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff grows to P230,000 if the response is sizable. Finally, if a large facility is built and demand turns out to be high, the payoff is P900,000.
a.) Draw a decision tree.
b.) Determine the expected payoff for each decision and event node.
c.) Whichalternative–buildingasmallfacilityorbuildingalargefacility–hasthe
higher expected payoff?
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