Scenario: LMD Technology Company is trying to decide whether to bid for an upcoming government contract to develop a new Medicare/Medicaid healthcare database system for the State of Georgia. If LMD does decide to bid, it must also decide how much to bid. The contract will be awarded to the low bidder.
If LMD place a bid, they have assessed the probability of there being no other bidders at 0.2, in which case they would by default be the lowest bidder and win the contract. If there are other bidders, the probability of underbidding the competitors (i.e. winning) will depend on the bid they submit. LMD has estimated the following probabilities of winning for three different potential bid level it is considering:
|
Bid Amount
|
Probability winning
|
Net Profit
(excluding bid costs)
|
|
$160,000
|
0.7
|
$25,000
|
|
$170,000
|
0.4
|
$35,000
|
|
$180,000
|
0.1
|
$45,000
|
The company estimates that the cost of placing a bid at $11,500 and the cost of developing and implementing the database (if it wins the contract) at $135,000, thus resulting in a net profit (not including the bid cost) of $25,000, $35,000 and $45,000 respectively for each of the bid amounts listed above.
a) For the above scenario, set up and solve the associated decision tree to portray the decision strategy with the highest expected net profit. Below the tree, state the decision strategy determined and the expected net profit.
b) Provide the risk profile (table) of the strategy you specified in part a