Question: 9. A retailer must decide whether to build a small or a large facility at a new location. Demand at the location can be either
9. A retailer must decide whether to build a small or a large facility at a new location. Demand at the location can be either low or high, with probabilities estimated to be 0.4 and 0.6, respectively. If a small facility is built and demand proves to be high, the manager may choose not to expand (payoff = GHS233,000) or to expand (payoff = GHS270,000), If a small facility is built and demand is low, there is no reason to expand and the payoff is GHS200,000. If a large facility is built and demand proves to be low, the choice is to do nothing (GHS40,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizeable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff is estimated to be only GHS20,000; the payoff grows to GHS220,000 if the response is sizeable. Finally, if a large facility is built and demand turns out to be high, the payoff is GHS800,000 Draw a decision tree. Then analyze it to determine the expected payoff for each decision and event node. Which alternative - building a small facility or building a large facility - has the higher expected
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