A Seattle entrepreneur must decide on the size of a latte stand to construct
The manager has narrowed the choice down to large or small. If he builds large and experiences low demand he could grin and bear it for a $200 daily profit, lower prices ($225 daily profit), or hire street performers to attract attention ($175 daily profit). If he builds small and experiences high demand he could do nothing ($175 profit per day), stay open longer hours (profit of $225/day), improve processes ($250/day profit), or raise prices ($200/day profit). Building large for high demand has an expected payoff of $250/day and building small for low demand has an expected payoff of $175/day. There is a 0.7 probability of high demand and 0.3 probability of low demand. Sketch a decision tree for this scenario and determine what size stand should be constructed to slake the unquenchable thirst of caffeine addicts.
What will be an ideal response?
Answer:
Large Stand = 0.7 × $250 + 0.3 × $225 = $242.50
Small Stand = 0.7 × $250 + 0.3 × $175 = $227.50
Therefore, choose the large stand.
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