Business Analytics: Uncertainty
Develop a decision tree that can be used to solve Chang’s problem. You can assume in this part of the problem
that she is using EMV (of her net profit) as a decision criterion. Build the tree so that she can enter any values
for p1, p2, and p3 (in input cells) and automatically see her optimal EMV and optimal strategy from the tree.
If p2 = 0.8 and p3 = 0.1, what value of p1 makes Chang indifferent between abandoning the project and going
ahead with it?
How much would Chang benefit if she knew for certain that the Olympic organization would guarantee her the
contract? (This guarantee would be in force only if she were successful in developing the product.) Assume p1 =
0.4, p2 = 0.8, and p3 = 0.1
Suppose now that this is a relatively big project for Chang. Therefore, she decides to use expected utility as her
criterion, with an exponential utility function. Using some trial and error, see which risk tolerance changes her
initial decision from “go ahead” to “abandon” when p1 = 0.4, p2 = 0.8, and p3 = 0.1.
Develop a decision tree using the most appropriate support tool as described in Part a.
Calculate the value of p1 as described in Part b. Show calculations.
Calculate the possible profit using the most appropriate support tool as described in Part c. Show calculations.
Calculate risk tolerance as described in Part d. Show calculations.
