Question

B2: The management of Black Company is considering a new product. They believe that White Company may come out with a competing product. Black Company has the following alternatives: If Black adds an assembly line for the product and White does not follow with a competitive product, their expected profit is $160,000; If Black add an assembly line and White does follow, they still expect a $40,000 profit. - If Black adds a new plant addition and White does not produce a competitive product, they expect a profit of $2,400,000, and - If White does compete for this market, Black expects a loss of $400,000. Required: For what value of probability that White Company will offer a competing product will Black be indifferent between the alternatives? [AR1: 10 marks] - - - - --- -- ---- -----

Answer 1

solo Let [1-p] the Probability that white offer a competing Product company will not (P] the Probability that white company will offer a compling Product Block company wou be indefferent between alternatives. EMV two alternatives Alternatives 1: Emul Add assembly lone] = (1-P) x 160,000 +Px 40.000 (1-P) x 1,60,000+Px 40,000 = 1-PX2409000+PC-409000) CI-D) x 1,60,000 +46,000p-P) x 24,00,000 - 4,00,000 P (4,00,000 + 40,000) p = (-) x (24,00,000 - 1,60,000) 440,000p - (1-P) X 22410,000 4,40,000 p = 22,00,000 - 22,40,000p 4,40,000 p + 2240,000 = 22,40,000 2689000p= 2249000 P 2240,000 26,80,000 P=0.83582 The Probability that white company will offer a competing Black company different between alternatives = 0.83582 Product