Reference no: EM1334496
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James Lawson's Bed and Breakfast, in a small historic Mississippi town, must decide how to subdivide (remodel) the large old home that will become its inn. There are three alternatives: Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults each. Option B would modernize only the second floor; the results would be six suites, four for two to four adults, two for two adults only. Option C (the status quo option) leaves all wallsintact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths.
(a) Based on the details of profit and demand patterns (see table below) that will accompany each option, draw the correct decision tree for James Lawson's Bed and Breakfast (please label and annotate).
Annual Profit Under Various Demand Patterns
Alternatives High p Average p
A (modernize all) $90,000 0.45 $27,000 0.55
B (modernize 2nd) $80,000 0.40 $75,000 0.60
C (status quo) $60,000 0.35 $50,000 0.65
(b) Based on the details of profit and demand patterns (see table below) that will accompany each option, what is the option with the highest expected value for James Lawson's Bed and Breakfast?
Annual Profit Under Various Demand Patterns
Alternatives High p Average p
A (modernize all) $94,000 0.50 $27,000 0.50
B (modernize 2nd) $82,000 0.35 $72,000 0.65
C (status quo) $64,000 0.35 $50,000 0.65