# Freemark Abbey Winery Case

Topics: Decision theory, Equals sign, Assignment Pages: 4 (1021 words) Published: September 3, 2013
Baur Bektemirov

BUSF 36106: Assignment 5

Freemark Abbey Winery
Assume that under no unusual circumstances (no storm), Jaeger sells 1,000 cases of Riesling. Consider diﬀerent cases: 1. Jaeger harvests grapes in anticipations of storm. Then the total revenue will be equal to 12×1000×\$2.85 = \$34200. 2. Jaeger doesn’t harvest and there is no storm with 50% chance. 2.1. With 40% chance, sugar concentration is 25%, then the total revenue is 12 × 1000 × \$3.50 = \$42000 2.2. With 40% chance, sugar concentration is 20%, then the total revenue is 12 × 1000 × \$3.00 = \$36000 2.3. With 20% chance, sugar concentration is below 20%, then the total revenue is 12 × 1000 × \$2.50 = \$30000 3. There is storm with 50% chance 3.1. Storm causes botrytis mold with probability 40%, then the price will increase but the total quantity produced will decrease by 30%. The total revenue is equal to 12 × 1000 × 70% × \$8.00 = \$67200. 3.2. With 60% chance, storm results in swelling of the berries and the price for a bottle goes down, though the total production output increases by 7.5%. The total revenue is 12 × 1000 × 107.5% × \$2.00 = \$25800. We can calculate the expected outcome based on conditional probabilities of each case or we can build a decision tree with a “decision” node at the beginning and “chance” nodes on the branch corresponding to the decision of not harvesting. The optimal decision for Jaeger is not to harvest; the expected revenue is \$39780.

Figure 1: Jaeger’s decision tree

Page 1

Baur Bektemirov

BUSF 36106: Assignment 5

Mega Pharma and Micro Pharma
In this analysis I use the following assumptions: i. If both MegaPharma and MicroPharma develop the drug, MicroPharma will sue with 100% chance (unless it sells the rights to MegaPharma or agree to sell the rights on the license). ii. MegaPharma believes that the sales will peak at \$500 million regardless of MicroPharma’s own predictions. iii. Market for the compound in the USA is of the same size as Europe and...

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