Supplement A: A firm that plans to expand its product line must decide whether to build a small, medium, or large production facility. A consultant’s report indicates a 0.60 probability that demand will high and a 0.40 probability that demand will be low. If the firm builds a small-size facility and demand is low, the firm is expected to earn $40 million. If demand turns out to be high, the firm can either subcontract and earn $75 million or expand the facility to earn $100 million. If the firm builds a medium-size facility and demand is low, then the firm is expected to earn $30 million. If demand turns out to be high, the firm can either do nothing and earn $100 million or can expand the facility to earn $120 million. If the firm builds a large-size facility and demand is low, the firm is expected to lose an estimated value of $20 million. If demand is high, earnings are expected to be $150 million
a) Draw a complete decision tree for this problem. Clearly present the decision and event nodes, the associated probabilities, and the payoffs.
b) What should the management do to achieve the highest expected payoff?