Ambassador automobiles aa is not sure of their order of 100, Ask an Expert

Economics

Ambassador Automobiles (AA) is not sure of their order of 100 units to Diversitek (D). Based on the market research, there is only a 35% chance that AA purchases the order of 100 units of SS from D and a 65% chance that AA purchases the order of 50 units of SS from D. If AA only orders 50 units, AA is willing to pay $6000 per unit to Diversitek. For an order of 100, AA will pay $5000 a unit to Diversitek.

(1) Re-construct a decision tree to capture the new conditions from above.

Note that your tree should include the following considerations if any.

Your resultant tree should have only THREE decision strategies that you can see their curves in the Cumulative Chart.

We use the negative sign (-) for the cost, the expenses, cash outflow, etc.

We use the positive sign (+) for the revenue, profit, cash inflow, etc.

(2) Generate the risk profile for the decision tree. The risk profile only includes the Cumulative Chart.

(3) Explain which optimal decision strategy should be chosen in terms of the concepts of EMV and stochastic dominance.

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91953015

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