An information system consultant is bidding on a project that involves some uncertainty. Based on past experience,
Question:
An information system consultant is bidding on a project that involves some uncertainty. Based on past experience, if all went well (probability 0.1), the project would cost $ 1.2 million to complete. If moderate debugging were required (probability 0.7), the project would probably cost $ 1.4 million. If major problems were encountered (probability 0.2), the project could cost $ 1.8 million. Assume that the firm is bidding competitively and the expectation of successfully gaining the job at a bid of $ 2.2 million is 0, at $ 2.1 million is 0.1, at $ 2.0 million is 0.2, at $ 1.9 million is 0.3, at $ 1.8 million is 0.5, at $ 1.7 million is 0.8, and at $ 1.6 million is practically certain.
a. Calculate the expected value for the given bids.
b. What is the best bidding decision?
Step by Step Answer:
Business Analytics Methods Models and Decisions
ISBN: 978-0321997821
2nd edition
Authors: James R. Evans