Use the following information to answer questions 1 to 5.A firm is deciding whether or not to enter a new market. The decision tree for the firm is provided below.The prompt below the decision tree explains how the decision tree was created.EnterDo Not EnterAllowed0.9Denied0.13ResearchNo ResearchGood0.7Bad0.356ProduceSellProduceSellProduceSell8910High0.75Low0.25High0.25Low0.75High0.6Low0.4Profit (5000s)1200-800-2001200-800-2001400-6000-1000At node 1, the firm must decide whether to enter the new market or not. The cost of attempting to enteris $100,000. The upper branch from node 2 shows that the firm has a 0.9 probability of being allowed toenter the market. If the firm is allowed to enter, it will have to pay $1,500,000 to buy the facilities requiredto become a part of the market. Node 3 shows that the firm will then consider doing a research study toforecast demand for their new product prior to beginning production. The cost of this study is $200,000.Node 4 is a chance node showing the possible outcomes of the market research study. Nodes 5, 6, and 7 aresimilar in that they are the decision nodes for the firm to either produce the products or sell their facilitiesto someone else. The decision to build the complex will result in an income of $3,000,000 if demand is highand $1,000,000 if demand is low. If the firm chooses to sell the facilities and entry into the market, incomefrom the sale is estimated to be $1,600,000. The probabilities shown at nodes 4, 8, and 9 are based on theprojected outcomes of the market research study. 1. What is the optimal decision strategy?(a)(b)(c)(d)(e)Enter, Research if entry is allowed, Sell if forecast is good, Produce if forecast is badDo Not EnterEnter, No Research if entry is allowed, ProduceEnter, No Research if entry is allowed, SellEnter, Research if entry is allowed, Produce if forecast is good, Sell if forecast is low

Determining the optimal decision strategy depends on various factors, including the context, the…

1. What is the optimal decision strategy? (a) Enter, Research if entry is allowed, Sell if forecast is good, Produce if forecast is bad (b) Do Not Enter (c) (d) (e) Enter, No Research if entry is allowed, Produce Enter, No Research if entry is allowed, Sell Enter, Research if entry is allowed, Produce if forecast is good, Sell if forecast is low

1. What is the optimal decision strategy? (a) Enter, Research if entry is allowed, Sell if forecast is good, Produce if forecast is bad (b) Do Not Enter (c) (d) (e) Enter, No Research if entry is allowed, Produce Enter, No Research if entry is allowed, Sell Enter, Research if entry is allowed, Produce if forecast is good, Sell if forecast is low

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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