Question
Brian owns a used car that needs repairs and is deciding whether to replace or repair it. Brian's goal is to minimize his total costs
Brian owns a used car that needs repairs and is deciding whether to replace or repair it. Brian's goal is to minimize his total costs over the next three years. Brian plans on attending graduate school as a full-time student in Chicago three years from now during which he will not need a car. At this time, the car requires $1,400 in repairs. If Brian repairs the car, he estimates there is a 25% probability that it will not need any repairs during the next three years. If the car does need repairs during the next three years, there is a 40% probability that these repairs will cost $2,500 and a 60% probability that they will cost $1,500. After three years, Brian estimates that he can sell this used car for $1,000.
Brian is also considering the option of selling his current used car for $2,200 and purchase a newer used car for $7,500. Under this scenario, Brian feels there is a 70% probability that he can sell this used car for $3,000 and a 30% probability that it will sell for $2,000 three years from now. Brian is assuming that the new used car will not require major repairs during the next three years.
Construct a decision tree for Brian that clearly depicts the respective probabilities and payoffs at each branch. You do not need to calculate the expected values.
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