A building supply store is considering expanding its capacity to meet a growing
ID: 404723 • Letter: A
Question
A building supply store is considering expanding its capacity to meet a growing demand for its products. The alternatives are to build a new store at a site nearby, expand the old one, or do nothing. Here are the regional economic outlook: a 60% chance that the economy will remain unchanged, a 20% probability of an upturn, and a 20% chance of an economic downturn. The following estimates of annual returns have been provided:
Market upturn (millions)
Stable market (millions)
Market downturn (millions)
Build new store
1.9
0.3
-0.5
Expand old store
1.5
0.5
-0.3
Do nothing
0.5
0
-0.1
Assume the goal is to maximize expected profit.
a) Set up a decision-tree for this problem
b) What should the company do?
c) What are the returns facing the company with this optimal decision?
Market upturn (millions)
Stable market (millions)
Market downturn (millions)
Build new store
1.9
0.3
-0.5
Expand old store
1.5
0.5
-0.3
Do nothing
0.5
0
-0.1
Explanation / Answer
may b C.
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