A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm’s capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P (low) = .3 and P (high) = .7. Construct a graph that will enable you to perform sensitivity analysis on the problem.
NEXT YEAR'S DEMAND
Alternative LOW-----------HIGH
Do nothing $38*------------------- $59
Expand 8 ---------------- 85
Subcontract 22---------------81
*Profit in $ thousands. Over what range of P (high) would the alternative of doing nothing be best? Expand? Subcontract? (Round your answers to 2 decimal places.) Optimal Ranges
Do nothing 0 to <______________
Expand ______________> to 1.00
Subcontract __________> to <___________