Decision tree assignment, A government committee is

Decision tree assignment

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Reference no: EM132214606

Decision Tree Assignment

1. A government committee is considering the economic benefits of a program of preventative flu vaccinations. If vaccinations are not introduced then the estimated cost to the government if flu strikes in the next year is $7m with probability 0.1, $10m with probability 0.3 and $15m with probability 0.6. It is estimated that such a program will cost $7m and that the probability of flu striking in the next year is 0.75. One alternative open to the committee is to institute an "early-warning" monitoring scheme (costing $3m) which will enable it to detect an outbreak of flu early and hence institute a rush vaccination program (costing $10m because of the need to vaccinate quickly before the outbreak spreads).

What recommendations should the committee make to the government if their objective is to maximize expected value?

2. A company is trying to decide whether to bid for a certain contract or not. They estimate that merely preparing the bid will cost $10,000. If their company bid then they estimate that there is a 50% chance that their bid will be put on the "short-list", otherwise their bid will be rejected.

Once "short-listed" the company will have to supply further detailed information (entailing costs estimated at $ 5,000). After this stage their bid will either be accepted or rejected.

The company estimates that the labor and material costs associated with the contract are $127,000. They are considering three possible bid prices, namely $155,000, $170,000 and $190,000. They estimate that the probability of these bids being accepted (once they have been short-listed) is 0.90, 0.75 and 0.35 respectively.

What should the company do and what is the expected monetary value of your suggested course of action?

3. ABC Computer Company is considering submission of a bid for a government contract to provide 10,000 specialized computers for use in computer-aided design. There is only one other potential bidder for this contract, Complex Computers, Inc., and the low bidder will receive the contract. ABC's bidding decision is complicated by the fact that ABC is currently working on a new process to manufacture the computers. If this process works as hoped, then it may substantially lower the cost of making the computers. However, there is some chance that the new process will actually be more expensive than the current manufacturing process. Unfortunately, ABC will not be able to determine the cost of the new process without actually using it to manufacture the computers.

If ABC decides to bid, it will make one of three bids: $9,500 per computer, $8,500 per computer, or $7,500 per computer. Complex Computers is certain to bid, and it is equally likely that Complex will bid $10,000, $9,000, or $8,000 per computer. If ABC decides to bid, then it will cost $1,000,000 to prepare the bid due to the requirement that a prototype computer be included with the bid. This $1,000,000 will be totally lost regardless of whether ABC wins or loses the bidding competition.

With ABC's current manufacturing process, it is certain to cost $8,000 per computer to make each computer. With the proposed new manufacturing process, there is a 0.25 probability that the manufacturing cost will be $5,000 per computer and a 0.50 probability that the cost will be $7,500 per computer. Unfortunately, there is also a 0.25 probability that the cost will be $8,500 per computer.

Should ABC Computer Company submit a bid, and if so, what should they bid per computer?

Reference no: EM132214606

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