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A firm faces uncertain revenues and uncertain costs. Its revenues may be $120,000, $160,000, or $175,000, with probabilities .2, .3, and .5, respectively. Its costs are $150,000 or $170,000 with chances .6 and .4, respectively. (Revenues and costs are independent.)

a. How many possible profit outcomes exist? Draw a decision tree listing these profit outcomes at the branch tips. Compute the firm's expected profit by folding back the tree. (It does not matter which uncertainty, demand or cost, is resolved first in the tree.)

 

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