From Chapter 9, Question 44 in Winston, Wayne L.; Albright, S. Christian (2011-0

Question

From Chapter 9, Question 44 in Winston, Wayne L.; Albright, S. Christian (2011-05-05). Practical Management Science. Cengage Textbook. Kindle Edition.

Two construction companies are bidding against one
another for the right to construct a new community
center building in Bloomington, Indiana. The first
construction company, Fine Line Homes, believes that
its competitor, Buffalo Valley Construction, will place

a bid for this project according to the distribution

shown in the file P09_44.xlsx. Furthermore, Fine Line
Homes estimates that it will cost $160,000 for its own
company to construct this building. Given its fine
reputation and long-standing service within the local
community, Fine Line Homes believes that it will
likely be awarded the project in the event that it and
Buffalo Valley Construction submit exactly the same
bids. Create a payoff table that lists the profit from
each Fine Line bid and each competing bid, and use it
to find the bid that maximizes Fine Line’s expected
profit. Why is this an easier approach than a decision
tree for this particular problem?

Explanation / Answer

Payoff Table

Thus, the bid that maximises the profit is $170000.

$ $ $ $ Bid 160000 165000 170000 175000 Less: Cost of Construction 160000 160000 160000 160000 Profit Nil 5000 10000 15000 Probability 0.40 0.30 0.20 0.10 Expected Profit Nil 1500 2000 1500

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