Determine the optimal decision strategy

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Reference no: EM131129920

The Los Gatos Art Gallery has a valuable painting that it wishes to sell at auction. There will be three bidders for the painting. The first bidder will bid on Monday, the second will bid on Tuesday, and the third will bid on Wednesday. Each bid must be accepted or rejected before the next bidder bids. If all three bids are rejected, the painting will be sold for a standing offer of $900,000. The Art Gallery’s chief auctioneer’s estimates for the bid probabilities are contained in the table below: Amount of Bid Bidder 1 (Monday) Bidder 2 (Tuesday) Bidder 3 (Wednesday) $1,000,000 0.0 0.0 0.7 $2,000,000 0.5 0.9 0.0 $3,000,000 0.5 0.0 0.0 $4,000,000 0.0 0.1 0.3 For example, the auctioneer has estimated that the likelihood that the second bidder will bid $2,000,000 is 90%. (a) Use a decision tree to determine the optimal decision strategy for which bid to accept. (b) Draw a risk profile for the optimal decision.

Reference no: EM131129920

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