(Value of Information): Midwest Freight Inc.(MFI) is a logistics company handling fragile item shipping. MFIhas received an order with the stipulation that if the item arriveslate, MFI will pay $1,000 for each late day.
MFI will make $40,000 if the item is delivered on time, but willlose $17,000 if it is defective. MFI can easily deliver the systemon time. However, it may, with probability 0.5, be defective. Thedeficiency can be removed by an adjustment that costs $2,000, butthis would delay delivery by 10 days. MFI can also test if the itemneeds adjustment. However, the test is fallible and costssomething. A technical company Bob Ability Inc. (BAI) estimatesthat there is a 0.6 probability that the test will be favorable(the item does not seem to need adjustment). BAI also thinks thatif the test is favorable, there is 25% chance that the item doesneed adjustment; if the test is unfavorable, this chance increasesto 87.5%.
1) Draw the decision tree for MFI.
2) What is the maximum cost of the test that MFI wouldaccept?
