Answered: Construct a decision tree of the above…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Dorika is a leading comedian in Zambia. A movie producing company and a TV network both want exclusive rights to her latest comedy series. The TV network is willing to pay a single lump sum, but if she signed with the movie company, the sum she receives will depend on how the market responds to her series.

The network is willing to pay a flat K900,000-00. The movie company is prepared to pay K200,000-00, K1,001000-00, and K3,000,000-00 for a ‘Minimal Hit’, ‘Average Hit’, and ‘Massive Hit’, respectively. The statisticians are forecasting a 30% probability of a minimalhit, 60% for an average hit, and a 10% for massive hit.

Required:

a) Construct a decision tree of the above situation clearly identifying the decision and chance nodes.l

b) What are the expected payoffs for each decision and your recommendation to Dorika?

c) If Dorika had the relevant information on all the possibilities, what would be her expected payoff

d) What price would you recommend he pays to acquire the additional relevant information?

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