As a result of an increase in demand for maize seeds, kenya seed company is reviewing its operations. a decision has to be made to select one of the following options for the next year.
option 1: make no change. annual profit is shs. 150,000. there is no likelihood that this will provoke new competition.
option 2: raise prices by 50%. if this occurs there is a 60% chance that farms will be set up in completion this year. in this situation the company estimates its annual profit as follows:
2a: with new competitor 2b: without new competitor
probability profit(ksh) probability profit (ksh)
0.4 160,000 0.5 220,000
0.2 110,000 0.2 170,000
0.4 90,000 0.3 120,000
option 3: expand the maize seed quickly at a cost of ksh. 50,000, keeping prices the same. the profits are then estimated to be like in 2b above except that the probabilities would be 0.4, 0.3, and 0.3 respectively.
required:
draw a decision tree for this problem.
using expected values analyze the decision tree and advise.