Question

The NBS television network earns an average of $400,000 from a hit show and loses an average of $100,000 on a flop. Of all shows reviewed by the network, 25% turn out to be hits and 75% turn out to be flops. For $40,000, a market research firm will have an audience view a pilot of a prospective show and give its view about whether a show will be a hit or a flop. If a show is actually going to be a hit, there is a 90% chance that the market research firm will predict the show to be a hit. If the show is actually going to be a flop, there is an 80% chance that the market research firm will predict the show to be a flop. Determine how the network can maximize its expected profits by doing the following:

a. Construct the decision tree.

b. What would be the expected profit if the market research firm is hired?

Answer 1