Reference no: EM132742345
St. John's Brewery (SJB) is getting ready for a busy tourist season. SJB wants to either increase production or produce the same amount as last year, depending on the demand level for the coming season. SJB estimates the probabilities for high, medium and low demands as 0.28, 0.32, and 0.4 respectively, on the basis of the number of tourists forecasted by the local recreational bureau. If SJB increases production, the expected profits corresponding to high, medium and low demands are $625,000, $250,000 and $100,000 respectively. If SJB does not increase production, the expected profits are $450,000, $325,000 and $175,000 respectively.
Problem 1: Construct a decision tree for SJB. On the basis of the EV, what should SJB do?
Problem 2: What is the expected value of increasing production?
Problem 3: What is the expected value of not increasing production?
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