1.Your brewery faces two related decisions, one with respect to pricing and the other with respect to marketing. With respect to pricing, it can maintain its "standard" price or it can adopt a lower "discount" price. With respect to marketing, it can keep with its current advertising campaign or it can expand its advertising. The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will continue healthy growth or whether it will experience a recession. The table below shows the firm's possible profit results (in $ thousands) depending on its price and advertising actions. Finally, in consultation with an economist you know, you judge that there is an 75% chance of growth and a 25% chance of a recession.

Growing Economy Recession

Standard P + Level Ads

25 -20

Discount P + Level Ads

15 0

Standard P + Increased Ads

30 -45

Discount P + Increased Ads

20 -10

(a) Your brewery must make its decision now (before knowing the future course of the economy). Which of the four alternatives maximizes its expected profit?

(b) Now suppose that you can wait and decide your pricing decision after you know the course of the economy. (You still must make its advertising decision immediately.) Draw a decision tree to find the firm's best course of action.