If she continues the project, Chang must invest $200,000 in research and development. In addition, making a proposal (which she will decide whether to do after seeing whether the R&D is successful) requires developing a prototype timing system at an additional cost. The additional cost is $50,000 if R&D is successful (so that she can develop the new timing system) and $40, 000 if R&D is unsuccessful (so that she needs to go with the older timing system). Finally if Chang wins the contract , the finished product will cost an additional $150,000 to produce.
A. Develop a decision tree that can be used to solve Chang’s problem. You can assume in this part of the problem that she is using EMV (of her net profit) as a decision criterion. Build the tree so that she can enter any values for p1, p2, and p3 (in input cells) and automatically see her optimal EMV and optimal strategy from the tree.
If p2 5 0.8 and p3 5 0.1, what value of p1 makes Chang indifferent between abandoning the project and going ahead with it?"
B. If P2=.8 and P3=.1, what value of P1 makes Chang indifferent between abandoning the project and going ahead with it.
C. How much would Chang benefit if she knew for certain that the Olympic organization would guarantee her the contract?(This guarantee would be in force only if she were successful in developing the product). Assume P1 =0.4 P2=.08 and P3 = 0.1.
D. Suppose now that this is a relatively big project for Chang. Therefore, she decides to use unexpected utility as her criterion, with an exponential utility function. Using some trial and error, see which risk tolerance changes her initial decision from “go ahead” to “abandon” when P1=.4 P2=.8 and P3=.1.