Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard.
Management is considering two varieties of white grapes for the new vineyard:
Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry
Chardonnay wine, and the Riesling grapes would be used to produce a semi-dry Riesling
wine. It takes approximately four years from the time of planting before new grapes can
be harvested. This length of time creates a great deal of uncertainty concerning future
demand and makes the decision concerning the type of grapes to plant difficult. Three
possibilities are being considered: Chardonnay grapes only; Riesling grapes only; and
both Chardonnay and Riesling grapes. Seneca management decided that for planning
purposes it would be adequate to consider only two demand possibilities for each type of wine: strong or weak. With two possibilities for each type of wine it was necessary to assess
four probabilities. With the help of some forecasts in industry publications management
made the following probability assessments.

$\begin{matrix}
\text{ } & \text{Riesling} & \text{Demand}\\
\text{Chardonnay Demand} & \text{Weak} & \text{Strong}\\
\text{Weak} & \text{.05} & \text{.50}\\
\text{Strong} & \text{.25} & \text{.20}\\
\end{matrix}$

Revenue projections show an annual contribution to profit of $20,000 if Seneca Hill only
plants Chardonnay grapes and demand is weak for Chardonnay wine, and$70,000 if they
only plant Chardonnay grapes and demand is strong for Chardonnay wine. If they only
plant Riesling grapes, the annual profit projection is $25,000 if demand is weak for Riesling
grapes and$45,000 if demand is strong for Riesling grapes. If Seneca plants both types
of grapes, the annual profit projections are shown in the following table.

$\begin{matrix}
\text{ } & \text{Riesling} & \text{Demand}\\
\text{Chardonnay Demand} & \text{Weak} & \text{Strong}\\
\text{Weak} & \text{\$22,000} & \text{\$40,000}\\
\text{Strong} & \text{\$26,000} & \text{\$60,000}\\
\end{matrix}$

a. What is the decision to be made, what is the chance event, and what is the consequence?
Identify the alternatives for the decisions and the possible outcomes for the chance events.
b. Develop a decision tree.
c. Use the expected value approach to recommend which alternative Seneca Hill Winery
should follow in order to maximize expected annual profit.
d. Suppose management is concerned about the probability assessments when demand
for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also
be strong in this case. Suppose the probability of strong demand for Chardonnay and
weak demand for Riesling is .05 and that the probability of strong demand for Chardonnay
and strong demand for Riesling is .40. How does this change the recommended
decision? Assume that the probabilities when Chardonnay demand is weak
are still .05 and .50.
e. Other members of the management team expect the Chardonnay market to become
saturated at some point in the future, causing a fall in prices. Suppose that the annual
profit projections fall to $50,000 when demand for Chardonnay is strong and Chardonnay
grapes only are planted. Using the original probability assessments, determine
how this change would affect the optimal decision.