SciTools Incorporated, a company that specializes in scientific instruments, has been invited to make a bid on a government contract. The contract calls for a specific number of these instruments to be delivered during the coming year. The bids must be sealed, so that no company knows what the others are bidding, and the low bid wins the contract. SciTools estimates that it will cost $5000 to prepare a bid and $95,000 to supply the instruments if it wins the contract. On the basis of past contracts of this type, SciTools believes that the possible low bids from the competition, if there is any competition, and the associated probabilities are those shown in Table 6.2. In addition, SciTools believes there is a 30% chance that there will be no competing bids. What should SciTools bid to maximize its EMV?
Table 6.2
Less than $110,000 = 0.2 probability
Between $110,000 and $120,000 = 0.4 probability
Between $120,000 and $130,000 = 0.3 probability
Greater than $130,000 = 0.1 probability
Objective: To develop a decision model including decision trees that finds the EMV for various bidding strategies and indicates the best bidding strategy.
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