Question: Question QUESTION 1 Town Construction Company must decide whether to use Plan A or Plan B for Town Home restoration. The expected profit (RM) depends

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Question QUESTION 1 Town Construction Company

QUESTION 1 Town Construction Company must decide whether to use Plan A or Plan B for Town Home restoration. The expected profit (RM) depends on the overall demand for the houses and the company has prepared the following payoff table: Demand Plan Good Poor A 60,000 10,000 B 90,000 -20,000 The company estimated the probability the demand will be Good is 0.65. Town Construction Company is also considering hiring an economic forecaster at a fee of RM10,000 to improve the probability estimates for the demand. The forecaster will predict and give report whether the demand will be high or low. Based on experiences, the following probabilities are estimated: Probability of a high report = 0.58 Probability of Good demand given a high report = 0.89 Probability of Poor demand given a low report = 0.68 a) Draw a decision tree for the above problem. (5 marks) b) Determine the decision strategy the company should follow. (8 marks) c) Calculate the maximum amount the company would be willing to pay to the economic forecaster. (2 marks)

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