A logistics provider plans to have a new warehouse built to handle increasing demands for its services. Although the company is unsure of how much demand there will be, it must decide now on the size[large or small] of the warehouse. Preliminary estimates are that if a small warehouse is built and demand is low, the monthly income will be $700,000. If demand is high it will have to either expand the facility or lease additional space. Leasing will result in monthly income of $100,000 while expanding will result in a monthly income of $500,000.
If a large warehouse is built and demand is low, monthly income will only be $40,000, while if demand is high, monthly income will be $ 2 million.
a. Construct a tree diagram for this decision.
b. Using your tree diagram, identify the choice that would be made using each of the four approaches for decision making under uncertainty.