Question

FACTORS FOR R CHARTS Number of Observations in Subgroup. Factor for x Chart Lower Control Limit. D Upper Control Limit 0.73 0.43 0.42 о са 2.11 2.00 190 1. alls have fond memories activities at a local park. An artist has Sono is hoping to reproduce and sell framed copies to visitors. He Visitors to and residents of Glen Cairn Falls have fond memories activiti captured the experience in a set of drawings and is hoping to reproduk can make an elegant or a deluxe version of the same sets of drawings If the market is "good" he can sell 500 copies of the elegant version at he will sell only 300 at $100 each If the market is "good" he can sell 500 copies of the deluxe he will sell only 400 copies at $90 each. In either case, pro copies of the elegant version at $150 each. If the market is "not good." can sell 500 copies of the deluxe version at $120 each. If the market is not good, pesat >90 each. In either case, production costs will be approximately $40,000. he can also choose to do nothing. If he believes there is a 60% probability of a good market What should he do? Perhaps you could help with a decision tree (4 points). Show your you could help with a decision tree (4 points). Show your work and explain your recommendation (5 points)? what change to the probability of "good" would have to occur under the decision you did not choose for you to change your decision? (1 point only)

Answer 1

Answer

The decision tree is drawn below;

The Paintings must be framed in an elegant version as it has more expected revenue.

Probability of Bad market = 1 - Probability of Good Market

Let the probability of good market be "X"

Then, X*75000 + (1-X) * 30000 =X*60000 + (1-X) * 36000

21000 X = 6000

X = 0.2857

So, when the probability of good is lesser than 0.2857, we need to switch to deluxe version of drawings.

Decision point 1 Revenue at node = 0.60*75000+0.40*3000 0 = $57000 Good Market = 0.60 Revenue = $ 500*150 = $75000 Bad Market = 0.40 Revenue = $300*100 = $30000 Elegant Version Revenue at node = $0.60*60000+0.40*360 00 = $50400 Deluxe Version Good Market = 0.60 Revenue = $ 500*120 = $60000 Nothing Bad Market = 0.40 Revenue = $ 400*90 = $36000 Revenue = $0 Decision point Chance event