A Local Business Owner Is a Bit Uncertain of the Demand

question 63

Essay

A local business owner is a bit uncertain of the demand forecast, and he is timidly approaching the capacity decision for a business he is about to open. Here's how he describes the decisions that confront him over the next two years.
"First, I have to choose between building a large plant initially and building a small one that has room to expand. Or I could rent now and decide whether to build next year. That one, too, could be the large version or the small. If I build small, then after one year, I can review how good business was, and decide whether to expand. If I build large, there is no further option to enlarge."
Do not concern yourself with probabilities or payoff values. Simply draw the tree that illustrates the manager's decision alternatives and the chance events that go along with them. Use standard symbols for decision tree construction, and label all parts of your diagram carefully. To simplify, assume that business in the first year, and in the second, can be only "good" or "bad."

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Definitions:

Independent Contractors

Individuals or businesses that provide goods or services to another entity under terms specified in a contract, but are not considered employees.

Job Classification

The categorization of positions within an organization based on duties, responsibilities, and the level of authority.

Better Benefits

Enhanced advantages or perks provided to employees, beyond statutory requirements, aimed at improving their work-life balance and job satisfaction.

Equity Capital

Equity capital is the amount of money that is invested in a company by its owners, in exchange for ownership interest or shares.