Question

Acme Inc. is considering marketing one of two new video games: Galaxy Wars or Quasar Trek. Galaxy Wars is a distinctive game and appears to have no competition. Estimated profits (in thousands of dollars) under high, medium, and low demand are as follows:

Galaxy Wars	High	Medium	Low
Profit	900	850	250
Probability	0.20	0.55	0.25

Quasar Trek is a less distinctive game and is assumed that it may experience some market competition. Estimated profits (in thousands of dollars) with and without competition is as follows:

With Competition (Quasar Trek)	High	Medium	Low
Profit	750	300	150
Probability	0.25	0.45	0.30
Without Competition (Quasar Trek)	High	Medium	Low
Profit	1600	800	400
Probability	0.60	0.30	0.10

Use Excel for Each Problem

a. Develop a decision tree for the Acme Inc. problem.

b. Acme Inc. believes there is a 0.55 probability that its competitor will produce a new game similar to Quasar Trek. Given this probability of competition, the director of planning recommends marketing the Galaxy Wars video game. Using the expected monetary value as the basis for your decision, what is your recommended decision?

c. Use sensitivity analysis to determine what the probability of competition for Quasar Trek would have to be for you to change your recommended decision alternative.

d. Based on your decision tree, what is the Expected Value of Sample Information (EVSI)? Briefly summarize the meaning of this value.

Answer 1

gol: a) Develop a decision toree to the Vtech.problems Decision tore is a sewential tool that is represented in the form of a groph. It helps the management in the process et decision-making over a period of time. High Galaxy wars Medium 850 900 0.80 ما کر،O Low 1950 . 0:25 tiam with competition 750 Medium 300 10.55 D Low 4150 0.30 High @ 1600 I o.bo озост Trek f I without L. competition 0.45 Medium 800 Llow you 0:10: : b) Recommended decision using expected value: Expected value for Galary wars? It is given the probabilities are 0.20,0.55 and 0.25 and the probits are $900, 850 and 950.

LE Now, calculate the expected value An space Chalaxy wars with competition as follows: Evl Golary wars) = 0.2(900) + nars) = 0.21900) +0.55(850) 102(232) = 180 + 467.5+622.5 -710 Expected value for Quasar Trek with Conyetion 13 Ev (Quasar Turek with competition ) := 0.25(750) + 0.45(300) +0.30(150) : 187.5 +135 + 45 : = (367.5 ] Expected value for Qulozar Toek. ceithiovat cowyretition is EV (Quasar Teek without competition) = 0.60(1600) +0:30(800)ť -lo(400) : = 960 + 340+ 40 .-1.1840 Expected value for Quasar Trek : ..

o Quagar Trek It is given that the probability of Quasar with competion is 0.55, and without competition is os45 Now Calculate the expected value oto Quagan Toek as follows: Ev (Quasar Turek) - 0.55(367.5)+0.45 (1240) - 202.125 + 558 -1760-195 Hence, Quagar Tek should be grecommended with the expected value of $760, 195, which is better than the expected value of Golary wars. c). Graphical sensitivity analysis to determine probability of competition for Balory star Quasar Torek : let p be the probability of competition co dellas) Quasar Trek Expected valuelin tholisand 2 710 t- ---- Golazy wars 367.57

Now calculate the value of p by solving the equation of Expected value of Quasar Trek with competition and without competition as tollows 1840 - P(1240-367.5) - 710 1240-710 = 872.5 p ... P=.0.6074 The value of p is higher than 0.74. bebane making a change in the Galaxy wars game.