A manager needs to decide how many additional machines to buy to cope with a possible increase of demand. In order to maximize the profit, he has three alternatives: (1) buy two additional machines, (2) buy one additional machine, and (3) subcontract. If only one additional machine is purchased and demand is more than it can handle, a second additional machine can be purchased at a later time. If demand is high, the manager can choose three subsequent options: One option is to purchase one more machine. A second option is to use overtime. The third option is to do nothing. Details can be found in the following decision tree (Dollar values are the net profit).

1) What is the best decision?

Overtime

Subcontract

Purchase 1 additional machine later

Do nothing until the initial demand is observed

Purchase 2 machines initially

2)What is the expected net profit?

$5,800

$7,000

$5,400

$5,000

$5,200

3) What is the most amount of money that the manager would be willing to pay to learn about the market demand?

$400

$800

$1600

$0

$600

$ 4,000 $5,000 Do nothing Subcontract Overtime $ 6,000 High 1 machine Low 2 machines $ 4,000 $ 7,000 1 more machine High $5,000 Low $3,000 Probability: low demand (0.4); high demand (0.6)