Create a two-way sensitivity graph

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Reference no: EM131523796

Question: Reconsider Hugh Liedtke's decision as diagrammed in Figure 4.2. Note that three strategies are possible:

(1) accept \$2 billion,

(2) counteroffer \$5 billion and then accept \$3 billion if Texaco counteroffers, and

(3) counteroffer \$5 billion and then refuse \$3 billion if Texaco counteroffers.

Suppose that Liedtke is unsure about the probabilities associated with the final court outcome. Let p = P(10.3 Billion) and q = P(5 Billion) so that 1 p q = P(0 Billion). Create a two-way sensitivity graph that shows optimal strategies for Liedtke for possible values of p and q.

(Hint: What is the constraint on p þ q?)

If Liedtke thinks that p must be at least 0.15 and q must be more than 0.35, can he make a decision without further probability assessment?

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