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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 0.6 and 0.4, 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 $35,000. If she does exercise the advertising option, then the response to advertising will either be modest or sizable, with probabilities of 0.4 and 0.6, respectively. If the response is modest, the payoff is $35,000. If it is sizable, the payoff is $210,000. Finally, if a large facility is built and demand proves to be high, then no advertising is needed and the payoff is $600,000. a) What should Cheryl do to maximize her expected payoff? Choose the correct decision tree below. Note that all payoffs are in $1,000s. OA. OB. 220 Q 220 Q low (0.6) low (0.6) expand еxpand 290 290 large high (0.4 small high (0.4) don't expand 253 don't expand 253 1 modest (0.4) 35 modest (0.4) 35 sizable 210 sizable 210 (0.6) advertise advertise (0.6) small low (0.6) large low (0.6) 3 don't advertise 35 35 don't advertise high (0.4) high (0.4) 600 600

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 0.6 and 0.4, 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 $35,000. If she does exercise the advertising option, then the response to advertising will either be modest or sizable, with probabilities of 0.4 and 0.6, respectively. If the response is modest, the payoff is $35,000. If it is sizable, the payoff is $210,000. Finally, if a large facility is built and demand proves to be high, then no advertising is needed and the payoff is $600,000. a) What should Cheryl do to maximize her expected payoff? Choose the correct decision tree below. Note that all payoffs are in $1,000s. OA. OB. 220 Q 220 Q low (0.6) low (0.6) expand еxpand 290 290 large high (0.4 small high (0.4) don't expand 253 don't expand 253 1 modest (0.4) 35 modest (0.4) 35 sizable 210 sizable 210 (0.6) advertise advertise (0.6) small low (0.6) large low (0.6) 3 don't advertise 35 35 don't advertise high (0.4) high (0.4) 600 600

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter9: Decision Making Under Uncertainty
Section: Chapter Questions
Problem 46P
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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 0.6 and 0.4, 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 $35,000. If she does exercise the advertising option, then the response to advertising will either be modest or sizable, with probabilities of 0.4 and 0.6, respectively. If the response is modest, the payoff is $35,000. If it is sizable, the payoff is $210,000. Finally, if a large facility is built and demand proves to be high, then no advertising is needed and the payoff is $600,000. a) What should Cheryl do to maximize her expected payoff? Choose the correct decision tree below. Note that all payoffs are in $1,000s. OA. В. OB. 220 Q 220 low (0.6) low (0.6) expand expand 2 290 2 290 large high (0.4) small high (0.4) don't expand - 253 modest (0.4) 35 don't expand 253 modest (0.4) 35 1 1 sizable advertise sizable 210 (0.6) advertise - 210 (0.6) small low (0.6) large low (0.6). 35 3 don't advertise 35 don't advertise high (0.4) high (0.4) 600 600
Transcribed Image Text: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 0.6 and 0.4, 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 $35,000. If she does exercise the advertising option, then the response to advertising will either be modest or sizable, with probabilities of 0.4 and 0.6, respectively. If the response is modest, the payoff is $35,000. If it is sizable, the payoff is $210,000. Finally, if a large facility is built and demand proves to be high, then no advertising is needed and the payoff is $600,000. a) What should Cheryl do to maximize her expected payoff? Choose the correct decision tree below. Note that all payoffs are in $1,000s. OA. В. OB. 220 Q 220 low (0.6) low (0.6) expand expand 2 290 2 290 large high (0.4) small high (0.4) don't expand - 253 modest (0.4) 35 don't expand 253 modest (0.4) 35 1 1 sizable advertise sizable 210 (0.6) advertise - 210 (0.6) small low (0.6) large low (0.6). 35 3 don't advertise 35 don't advertise high (0.4) high (0.4) 600 600
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