Decision_Theory_problem

Decision_Theory_problem - Decision Theory Sample Problem:...

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Decision Theory Sample Problem : The state of California is contemplating building another airport in Los Angeles. It has identified two potential sites A and B. The state wants to build the airport at the site with the best profit potential. The profit potential is dependent on the estimated demand for the Gate spaces at the Airport and this is classified in two categories: low, high. The estimated probabilities of low and high demand is 0.4 and 0.6 respectively. If they build the Airport at site A and realize that the demand turns out to be high, there are two options: Do nothing, and Expand. The profit potential for the first option (Do Nothing) is $30 million. If they choose the Expand option, there are three alternatives: Do regular expansion, Expand through overtime, and Expand through subcontract. All of these occur with equal probability (probability of 1/3 each). The profit potential for each alternative is $40 million, $50 million and $45 million respectively. Similarly, if they build the Airport at site B
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