Draw a decision tree to represent this problem, Decision Analysis for Bidding on a Contract Assignment, SMU, Singapore

Question 1

A contractor is currently considering whether to bid for a certain contract or not and, if the decision is to bid, which profit margin can be applied to increase the chance of winning the contract. It is estimated that preparing the bid will cost £3,000. The contractor estimates that there is a 50% chance that their bid will be put on the “short-list”, otherwise their bid will be rejected.

Once short-listed, the contractor will have to provide further detailed information that will cost £5,000. After that, their bid will be either accepted or rejected. The risk is that if the bid is unsuccessful, the contractor will lose the cost of preparing the bid. The contractor considers three possible bid prices that will give profits to £30,000, £35,000, and £40,000. The probability of these bids being accepted(if they are short-listed)is0.9,0.75, and 0.35 respectively.

1. Draw a decision tree to represent this problem.
2. What is the best option for the contractor? andWhy?
3. Discuss how the contractor can increase his chance to win this contract.