Option 2: Raise prices by 50%. If this occurs, there is a 75% chance that an Entrepreneur will set up in competition this year. The board’s estimate of its annual profit in this situation would be as follows: 2A: With new competitor 2B: Without new competitor Probability Profit (Sh.) Probability Profit (Sh.) 0.25 150,000 0.5 200,000 0.5 120,000 0.3 150,000 0.25 80,000 0.2 100,000 Option 3: Expand the car park quickly at a cost of Sh. 50,000 keeping prices theSame. The profits are then estimated to be like 2B above, except that the probabilities would be 0.6, 0.3 and 0.1 respectively. Required: Draw a decision tree for the above problem, including all the relevant data. Using expected values analyze the decision tree and recommend the best option to the owners of the car park.
Option 2: Raise prices by 50%. If this occurs, there is a 75% chance that an Entrepreneur will set up in competition this year. The board’s estimate of its annual profit in this situation would be as follows:
2A: With new competitor 2B: Without new competitor
Probability Profit (Sh.) Probability Profit (Sh.)
0.25 150,000 0.5 200,000
0.5 120,000 0.3 150,000
0.25 80,000 0.2 100,000
Option 3: Expand the car park quickly at a cost of Sh. 50,000 keeping prices theSame. The profits are then estimated to be like 2B above, except that the probabilities would be 0.6, 0.3 and 0.1 respectively.
Required: Draw a decision tree for the above problem, including all the relevant data. Using expected values analyze the decision tree and recommend the best option to the owners of the car park.
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