ElecCo Inc. is a hydro electricity company who sells its electricity on the competitive market two times in a year. You, as a buyer, have a chance to buy your flat-rate year ahead electricity usage at the beginning of each year (week 1) for a lower price or wait and buy it in week 2 when the price may go higher or lower depending on the market. If you buy your electricity in week 1, your flat-rate tariff is £400 for a whole year energy consumption and you will be committed to your decision, i.e. no chance to change the deal or get a refund. At the time of decision, you also have an option to buy a refundable deal for £450 with the penalty of £20 in case you decide to change the deal in week 2. In week 2, there is a 50 percent chance that the tariff reduces to £300 and 50 percent chance that it grows to £600 for a whole year energy consumption.
(i) Formulate (with decision options and probabilities) a decision framework for this problem.
(ii) What would be the expected cost of waiting a week to buy the deal?
(iii) What would be the best strategy for you to buy electricity from ElecCo Inc. to minimise your expected expenses?
(iv) How would the market sensitivity affect your final decision in section (iii)?