Question

Exercise 5: A sculptor can sell his newly created masterpieces to an art dealer for resale at next weekend's art show. The offer from the dealer is for $ 12,000 for all the sculptures and is good for only a week. The sculpture could pursue selling the sculptures himself on internet, especially on a particular auction site for artists. If the bidding is strong (with a probability of 0.60), then the sculptor can receive up to $ 18,000 for all the sculptures using the auction site. However, if the bidding is weak, then the sculptor may only get $ 4,000 for his masterpieces. The auction site charges a flat rate of $ 600 for promoting the sculptor's work and has some past history on the auction process. (a). Draw the decision tree for this model. (b). Fill the decision tree with the relevant probabilities and expected returns. (c) What decision should the sculptor make? (d) How risky is the optimal decision?

Answer 1

Answer: Decision Tree for sculptor * Initial offer from dealer = 12,000 * Strong bidding can give 18,000 cupto) with probability 0.60 * weak bidding can give upto 41000 , Obviously with probability (1-0.6) 2004 * Also auction site is charging the rates of Goo, for promoting sculptors work'. a Decision Tree Offer from dealer 12,000 If not sell to him an decided to sell on internet.) Yes NO (sold to dealer) 121000 (through internet) Bidding (06) co.u) – probabilities 66 181000 4000 - 600 - 600 - cauction site charges) = 17400 = 3400. Expected Return = 0.6 (17400 )+ 0.4(3400) = 11800

(6) Here we can clearly see that at first node Coffer from deater) Sculptor will get 12000 with probability cool but at last node after bidding expected return would be 11800 which is less than 12000 Also, if he gone through weak bidding with 40% Chances then he can suffer a huge loss C2,000 - 3400) = 8600 i.e having nearly 17 of 12000 and the strond bidding, then he can earn upto 17400 in 17400-12000 = 5400 hihich Ps 451. of 12000 Hence he should take the offer from dealer. Since after bidding profit will be 45t of c2000 and loss will be severe it of rooo. (d) Oor optional decision won't be that much risky Since we are going with dealer with 100%. And if we look at monetary view (108s), the have had loss of 60oo. if we assume that bidding will be strong. that is, 6000-600 = 5400 lass.