Problem:

SuperFun Corp. is planning to open a new video arcade. It has narrowed the choices to a large or small arcade. (All costs and revenues in this problem are expressed in thousands of dollars.) The cost of a large arcade is $300, and the cost of a small arcade is $230. It has forecast that the demand will be low with probability 0.6 and high with probability 0.4. If SuperFun builds a small arcade and the demand is low, then it expects revenues of $280. If SuperFun builds a small arcade and the demand is high, then it has several alternatives: do nothing and earn revenue of $285, use overtime and earn revenue of $305 (over and above the cost of overtime), or expand the arcade and earn revenue of $300 (over and above the cost of expansion). If SuperFun builds a large arcade and the demand is high, then it expects revenues of $400. If SuperFun builds a large arcade and the demand is low, then it has two alternatives: do nothing and earn revenue of $280, or reduce prices and earn revenues of $330.

Required:

Question 1) Draw a decision tree for this problem.

Question 2) Which choice yields the maximum expected money value? (Show calculation)

Question 3) A consulting firm has offered to perform research and forecast the demand for SuperFun. The firm will charge $8 (thousand) for its services, and it claims that the information will be 100% accurate. Should SuperFun pay for the consulting services? Justify your response with numbers.

Question 4) There is some question about the probability of a high demand (currently estimated to be 0.4). What value for this probability would cause SuperFun to be indifferent between large and small arcades? Solve the given numerical problem and illustrate step by step calculation.