1A logistics provider plans to have a new warehouse built to handle increasing demands for its services

QUESTION:

1A logistics provider plans to have a new warehouse built to handle increasing demands for its services. Although the company is unsure of how much demand there will be, it must decide now on the size (large or small) of the warehouse. Preliminary estimates are that if a small warehouse is built and demand is low, the monthly income will be $ 700,000. If demand is high, it will have to either expand the facility or lease additional space. Leasing will result in a monthly income of $ 100,000 while expanding will result in a monthly income of $ 500,000.

If a large warehouse is built and demand is low, monthly income will only be $ 40,000, while if demand is high, monthly income will be $ 2 million.

a. Construct a tree diagram for this decision.

b. Using your tree diagram, identify the choice that would be made using each of the four approaches for decision making under uncertainty.


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