DecisionTrees_Ex

# DecisionTrees_Ex - Decision Tree Examples(1 SciTools Inc a...

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Decision Tree: Examples (1) SciTools Inc., a company that specializes in scientific instruments, has been invited to submit a bid on a government contract. The contract calls for a specific number of these instruments to be delivered during the coming year. The bids must be sealed and the lowest bid wins the contract. SciTools estimates that it will cost \$5000 to prepare a bid and \$95000 to supply the instruments if it wins the contract. Based on past contracts of this type, SciTools believes that the possible low bids from the competition and the associated probabilities are as follows: In addition SciTools believes there is 30% chance that there will be no competing bids. Also any bid above \$125000 would not be considered. Use decision tree analysis to figure out what should SciTools bid to maximize its EMV? (2) Jerry Smith is thinking about opening an apparel and clothing store. He is deliberating whether to build a large store, a small store or no store at all. He has done some analysis about the profitability of the apparel and clothing shop. If Jerry builds a large apparel and clothing store, he will earn \$60000 if the market is favorable but he will lose \$40000 if the market is unfavorable. A small shop will return \$30000 profit in a favorable market and a \$10000 loss in an unfavorable market. At present Jerry believes there is a 50-50 chance that the market will be favorable. Jerry consults his friend who is into marketing and the friend suggests him to do a market survey. It is estimated that there is a 0.6 probability that the survey will be favorable. Furthermore, there is a 0.9 probability that the market will be favorable given a favorable outcome from the study and there is only a probability of 0.12 of a favorable market if the survey results are not favorable. The survey will cost \$5000.

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