Question
A technology company must decide whether to bid for a government contract to develop a piece of equipment, and if the company decides to bid,
A technology company must decide whether to bid for a government contract to develop a piece of equipment, and if the company decides to bid, it must decide how much to bid. The government will award the contract to the low bidder. However, there is 20% probability that there will not be any other bidders. If there are other bidders, there is a 20% chance of underbid competitors if the bid price is $160K; 60% chance of underbid competitors if the bid price is $170K; and 90% chance of underbid competitors if the bid price is $180K. The company estimates that the cost of placing a bid is $7.5K and the cost of developing the equipment, given that it wins the contract, is $150K. So, for example, if the company bids $170K and wins the bid, its profit will be $20K less the cost of placing the bid.
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