Chapter 21.2, Problem 5E

The distance from Potsdam to larger markets and limited air service have hindered the town in attracting new industry. Air Express, a major overnight delivery service, is considering establishing a regional distribution center in Potsdam. But Air Express will not establish the center unless the length of the runway at the local airport is increased. Another candidate for new development is Diagnostic Research, Inc. (DRI), a leading producer of medical testing equipment. DRI is considering building a new manufacturing plant. Increasing the length of the runway is not a requirement for DRI, but the planning commission feels that doing so will help convince DRI to locate its new plant in Potsdam. Assuming that the town lengthens the runway, the Potsdam planning commission believes that the probabilities shown in the following table are applicable.

	DRI Plant	No DRI Plant
Air Express Center	.30	.10
No Air Express Center	.40	.20

For instance, the probability that Air Express will establish a distribution center and DRI will build a plant is .30.

The estimated annual revenue to the town, after deducting the cost of lengthening the runway, is as follows:

	DRI Plant	No DRI Plant
Air Express Center	$600,000	$150,000
No Air Express Center	$250,000	−$200,000

If the runway expansion project is not conducted, the planning commission assesses the probability that DRI will locate its new plant in Potsdam at .6; in this case, the estimated annual revenue to the town will be $450,000. If the runway expansion project is not conducted and DRI does not locate in Potsdam, the annual revenue will be $0 since no cost will have been incurred and no revenues will be forthcoming.

1. a. What is the decision to be made, what is the chance event, and what is the consequence?
2. b. Compute the expected annual revenue associated with the decision alternative to lengthen the runway.
3. c. Compute the expected annual revenue associated with the decision alternative to not lengthen the runway.
4. d. Should the town elect to lengthen the runway? Explain.
5. e. Suppose that the probabilities associated with lengthening the runway were as follows:

	DRI Plant	No DRI Plant
Air Express Center	.40	.10
No Air Express Center	.30	.20

What effect, if any, would this change in the probabilities have on the recommended decision?