Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck
The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. Develop a decision tree for this situation and indicate which type of truck he should select.
States of Nature
Alternatives Lower gas prices Gas prices unchanged Higher gas prices
Probability .3 .5 .2
Subcompact 16,000 19,000 21,000
Compact 15,000 20,000 22,000
Full size 24,000 19,000 6,000
The tree appears in the drawing below. The highest expected value decision alternative is the compact truck, at $18,900, as shown in the POM for Windows solution.
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