The Last Step in Decision Tree Analysis Methodology Is to

question 76

Multiple Choice

The last step in decision tree analysis methodology is to

• A) identify factors such as demand, price, and exchange rate, whose fluctuation will be considered over the next T periods.
• B) identify the periodic discount rate k for each period.
• C) start at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step. Expected cash flows at each step in a given period should be discounted back when included in the previous period.
• D) identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated.
• E) identify representations of uncertainty for each factor; that is, determine what distribution to use to model the uncertainty.

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Definitions:

Consumer Surplus

The difference in the amount consumers would ideally pay for a service or good versus what they really spend.

Producer Surplus

The imbalance between the desired compensation by producers for a good or service and the real income they secure.

Binding Price Ceiling

A government-imposed limit on the price of a commodity or service that is set below the market equilibrium price, causing a shortage.

Binding Price Floor

A government-imposed price control set above the equilibrium price, causing a surplus by forcing the price to be higher than what the market would naturally set.