Question

Luna, a former classmate of Kiana’s, has developed a new product called the Cat Castle. Luna came to Kiana for advice on how she should evaluate her options. Kiana suggested they develop a payoff table and then use it to evaluate her options. First, they had to determine the Decision Alternatives, States of nature and payoffs. Luna was trying to decide between:

Sell the product to another company and move to the beach, Hire SBPR to market and distribute the product, Market the product herself and sell on Amazon.

Selling the product directly, she can sell it for $50,000.

If she chooses to hire SBPR to market and distribute the product, her payoff will depend on the economic environment (or states of nature). If the economy is “good”, then the estimated payoff to Luna is $85,000. “Moderate” economy is estimated to have a payoff of 60,000. “Bad” economy is estimated to have a payoff of $35,000 and if there is “Financial Crisis”, Luna would lose $500. If she chooses to market the product herself and sell on Amazon, her payoffs are as follows: If there is “good” economy, she estimates a payoff to be $100,000. “Moderate” economy is estimated to have a payoff of $70,000. “Bad” economy is estimated to have a payoff of $40,000 and “Financial Crisis “would cost Luna $15,000. To turn in at the beginning of class:

What are the decision alternatives? What are the States of Nature? What are the payoffs?

Build the payoff table and label these items.

Answer 1

The decision alternatives are to: (1) Sell the product to another company and move to the beach, (2) Hire SBPR to market and distribute the product, (3) Market the product herself and sell on Amazon.

The states of nature are - (i) good economy (ii) moderate economy (iii) bad economy (iv) financial crisis

Payoff and the payoff table is shown below in the excel table:

	Good economy	Moderate economy	Bad economy	Financial crisis
Decision alternatives	Pay-off in $
Sell the product to another company	50,000.00	50,000.00	50,000.00	50,000.00
Hire SBPR to market and distribute the product	80,000.00	60,000.00	35,000.00	0.00
Market the product herself and sell on Amazon	100,000.00	70,000.00	40,000.00	15,000.00