Final answer:
Constructing a decision tree requires considering the binomial uncertainty in demand and price fluctuations in the lease and spot market, while also calculating the price elasticity of supply to understand sensitivity to price changes.
Step-by-step explanation:
To construct a decision tree for the trip logistics, start by considering two scenarios based on the current demand uncertainty: an increase of 30% or a decrease of 30%, each with a probability (p) of 0.5. For the increase, the demand would be 130,000 units, requiring additional warehouse space. Similarly, if the demand decreases, only 70,000 units would be required. This binomial uncertainty must be analyzed in conjunction with the lease and spot market prices, which also have an uncertainty component with a 15% increase or decrease and equal probabilities. Calculate the cost for each scenario based on the unit's revenue of $2.22 per demand, a lease price of $2.00 per sq. ft. per year, and a spot market price of $2.20 per sq. ft. per year.The price elasticity of supply must be calculated to understand the price sensitivity. Using the example data, when the rent goes from $650 to $700, supplied units increase from 10,000 to 13,000, a 30% increase. The percentage change in quantity supplied is divided by the percentage change in price to get the elasticity. Here, price sensitivity or elasticity is calculated as (13,000 - 10,000) / 10,000 divided by ($700 - $650) / $650. This will help in understanding how sensitive the supply is to price changes, influencing the decision tree outcomes.Conclusion Therefore, by analyzing the potential changes in demand and considering the elasticity of supply, we can create a comprehensive decision tree that accounts for the varying costs and demand scenarios. This information enables a business to make informed decisions about warehousing and pricing strategies in the face of uncertainty.