Exercise on Decision Tree: London Pop Concert

An entertainment company is organizing a pop concert in London. The company has to

decide how much it should spend on publicizing the event and three options have been
identified:

Option 1: Advertise only in the music press;

Option 2: As option 1 but also advertise in the national press;
Option 3: As options 1 and 2 but also advertise on commercial radio.

For simplicity, the demand for tickets is categorized as low, medium or high. The payoff
table below shows how the profit which the company will earn for each option depends
on the level of demand.

Demand
Option Low Medium High
1 -20 -20 100
2 -60 20 60
3 -100 -60 20

It is estimated that if option 1 is adopted the probabilities of low, medium and high
demand are 0.4, 0.5 and 0.1, respectively. For option 2 the respective probabilities are
0.1, 0.3 and 0.6 while for option 3 they are 0.05, 0.15 and 0.8.
a. Describe the company’s decision making
1. what is the problem
2. what are decision node for the problem
3. what are SON (State Of Nature) for the problem
4. what are the company’s payoff
b. With information from (a), construct a decision tree
c. Determine the option which will lead to the highest expected profit.
d. Would you have any reservations about recommending this option to the
company?