The owner of a tourist hotel in Windhoek is facing a difficult decision. It is low season and because the weather is unpredictable at this time of the year it is difficult to predict the demand for the hotel’s facilities. If the weather is poor, then there will be 200 room nights demanded for the hotel’s facilities. There is a 70% likelihood of the weather being poor.If the weather is good then there will be 600 room nights demanded for the hotel’s facilities, but there is only a 30% chance that the weather will be good.
The owner of the hotel is considering advertising some reduced prices locally or nationally to improve the demand during this period.
If the reduced prices are advertised locally and if the weather is poor, then there is a 60% chance that the lower prices would affect demand and would cause there to be 300 room nights demanded, but if the weather is good, then there is a 40% chance that the lower prices would affect demand and would cause there to be 800 room nights demanded. If these lower prices were advertised nationally there is a 50% chance that these demand levels would increase to 400 room nights and 900 room nights respectively. The earnings expected, (before deducting the costs of any local or national advertising), at different levels of demand are as follows:
The costs of advertising locally and nationally are NS10 000 and N$25 000 respectively.
Prepare a decision tree to illustrate the above problem and use it to recommend the best course of action for the owner of the hotel.
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