You are in the process of planning a vacation to an exotic tropical island. The island is served by only one airline that is offering the following fare options:

1. Buy a non-refundable ticket for $850

2. Buy a fully refundable flexible ticket for $2000

If you buy now, there is a 25% chance that your trip will need to be cancelled at the last minute because of demands from work. Unused non-refundable tickets have no redemption value (are worthless), but a flexible ticket can be refunded for the full price of the ticket. You can also wait a week before buying your ticket. In that case, you assess that there is a 30% chance that fares will increase. If this happens, non-refundable tickets will increase to a price of $1200, whereas the price of the flexible tickets will be $2200. However, in a week you will have greater clarity with regard to work demands, and the chance that the trip will need to be cancelled after you purchase the ticket will go down to just 5%.

You have already determined that this vacation is worth going on (unless forced to cancel due to work reasons). You assign a dollar value to the pleasure and satisfaction of going on this vacation (assume this is $7,500).

a) Draw the decision tree

b) Describe the optimal decision in words (be careful to specify what needs to be done at each decision point that could be reached).

c) What is the EMV of the optimal decision?

d) Suppose the option to buy a week from now can only be obtained by paying a fee. What is the most you would be willing to pay for this option (i.e. what is the value of being able to delay a decision)?