Question

2. A consumer electronics company is planning to introduce a new device. After careful consideration of costs, (e.g., there is a fixed cost of $5 million for developing the item), the projected state of the economy, etc., the marketing manager came up with the following payoff table (in $millions)

Courses of action

Event Market item Do not market item

Introduction successful $50 -$5

Introduction not successful -$40 -$5

a. What are the decisions?

b. What are the states of nature?

c. What decision criterion would a conservative decision-maker make?

d. Use your answer in c. to determine what decision should be made in this case. Show all work to justify your answer.

e. What decision criterion would an optimistic decision-maker make?

f. Use your answer in e. to determine what decision should be made in this case. Show all work to justify your answer.

g. Draw a decision tree for this problem. Assume that the probability that the introduction is successful is 0.4.

h. Use your decision tree to determine which decision should be chosen via the EV method.

 

i. What is the expected value WITHOUT perfect information?

j. What is the expected value WITH perfect information?

k. What is the expected value OF perfect information (EVPI)?

l. Sketch the risk profiles for the two decisions. Which is the riskier decision?

Answer 1

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AS FOR GIVEN DATA..

a) Decisions are 1) Market item

2) Don't market the item

b) States of nature

1) Introduction is successful

2)Intrduction si not successful

c) Conservative - (Maximin) or (Pessimist)

The maximin person looks at the worst that could happen under each action and then choose the action with the largest payoff. They assume that the worst that can happen will, and then they take the action with the best worst case scenario. The maximum of the minimums or the "best of the worst".

d)

	market	don't market
Successful	50	-5
Not successful	-40	-5
minimum	-40	-5

max(-5,-40 ) = -5 hence don't market

e)

Maximax (Optimist)

The maximax looks at the best that could happen under each action and then chooses the action with the largest value. They assume that they will get the most possible and then they take the action with the best best case scenario. The maximum of the maximums or the "best of the best". This is the lotto player; they see large payoffs and ignore the probabilities.

f)

	market	don't market
Successful	50	-5
Not successful	-40	-5
maximum	50	-5

max(50,-5) = 50

hence market

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