Question

Please help with these parts!

Problem 13-19 Hale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network's decision or transfer the rights for the pilot and series to a competitor for $100,000. Hale's decision alternatives and profits (in thousands of dollars) are as follows: State of Nature Decision Alternative Produce pilot, di Sell to competitor, d2 Reject, Sı -100 100 1Year, S2 2 Years, S3 50 150 100 100 The probabilities for the states of nature are P(S1) = 0.20, P(Sz) = 0.30, and P(S3) = 0.50. For a consulting fee of $5,000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F or an unfavorable (U) review and that the following probabilities are relevant P(S1lU) 0.45 PlS2IU) = 0.39 P(S3lU)0.16 P(F) 0.69 P(SIF)-0.09 P(S2lF 0.26 P(SIF) = 0.65 P(U) 0.31

Answer 1

Generate the decision tree as follows:

100 100 d1 01015 S3 F 0.69 150 0 101.5 100 100 d2 100 100 100 S3 F 100 Review 100 0 101.035 100 100 d1 S2İU S3 U 0.31 150 150 100 100 100 d2 01.035 100 100 100 100 100 100 100-100 d1 150 No revicw 150 100 100 100 d2 100 100 100 100 100

c.

EVPI = Expected value with perfect information - max.EMV

= 100*0.2 + 100*0.3 + 150*0.5 - 100

= 25 thousand

d.

If favourable, go for d1 i.e. produce; if unfavourable, go for d2 i.e. sell.

e.

Expected Value of Sample Information = 101.035 - 100 = 1.035 thousand

f.

$5 thousand is more than 1.035 thousand. So, the decision is No.

Should pay no more than the EVSI which is 1.035 thousand