Computing optimal bid and expected profit

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Reference no: EM1377328

Gamma Construction Corporation has been asked to bid on the construction of twenty lighted tennis courts for State University. Every court will cost $20,000 in construction expenses, and in addition, there will be a fixed expense of $10,000 to cover the preparation and submitter of the bid. Gamma is considering five different bid levels. Each level involves a different profit margin, calculated as a percentage above total construction cost (TCC). Fixed expenses are excluded from this calculation, but they are relevant for profitability. Based on previous experience. Gamma's management is able to estimate the probability that it will win the bed at each level being considered. The bids and the probabilities are summarized in the table below.
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Bid Number Amount of Bid Probability of Winning
1 TCC + 5% 0.80
2 TCC + 10% 0.70
3 TCC + 15% 0.50
4 TCC + 20% 0.30
5 TCC + 25% 0.20
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Gamma's objective is to select the bid that maximizes its expected profit.
a. What is the optimal bid for Gamma to make?
b. What is the expected profit associated with the optimal bid in part (a)?
c. What is the risk profile for the optimal bid in part (a)?
d. Consider the probability of winning the optimal bid. If this parameter were allowed to vary, while all other parameters were kept unchanged, what values could it take without altering the optimal selection?

Reference no: EM1377328

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