Your company must decide whether to introduce a new product. The sales of the product will be either at a high (success) or low (failure) level. The conditional value for this decision is as follows Decision High Low Introduce $4,000,000 -$2,000,000 Do Not Introduce 0 0 Probability 0.3 0.7 You have the option to conduct a market survey to sharpen you market demand estimate. The survey costs $200,000. The survey provides incomplete information about the sales, with three possible outcomes: (1) predicts high sales, (2) predicts low sales, or (3) inconclusive. Such surveys have in the past provided these results Result High Low Predicts High 0.4 0.1 Inconclusive 0.4 0.5 Predicts Low 0.2 0.4 a) Using expected monetary value, what is your decision? b) What is the expected value of perfect information before taking the survey? c) Draw the complete decision tree, including the survey option.
Your company must decide whether to introduce a new product. The sales of the product will be either at a high (success) or low (failure) level. The conditional value for this decision is as follows Decision High Low Introduce $4,000,000 -$2,000,000 Do Not Introduce 0 0 Probability 0.3 0.7 You have the option to conduct a market survey to sharpen you market demand estimate. The survey costs $200,000. The survey provides incomplete information about the sales, with three possible outcomes: (1) predicts high sales, (2) predicts low sales, or (3) inconclusive. Such surveys have in the past provided these results Result High Low Predicts High 0.4 0.1 Inconclusive 0.4 0.5 Predicts Low 0.2 0.4 a) Using expected monetary value, what is your decision? b) What is the expected value of perfect information before taking the survey? c) Draw the complete decision tree, including the survey option.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Your company must decide whether to introduce a new product. The sales of the product will be either at a high (success) or low (failure) level. The conditional value for this decision is as follows
|
Decision |
High |
Low |
|
Introduce |
$4,000,000 |
-$2,000,000 |
|
Do Not Introduce |
0 |
0 |
|
Probability |
0.3 |
0.7 |
You have the option to conduct a market survey to sharpen you market demand estimate. The survey costs $200,000. The survey provides incomplete information about the sales, with three possible outcomes: (1) predicts high sales, (2) predicts low sales, or (3) inconclusive. Such surveys have in the past provided these results
|
Result |
High |
Low |
|
Predicts High |
0.4 |
0.1 |
|
Inconclusive |
0.4 |
0.5 |
|
Predicts Low |
0.2 |
0.4 |
- a) Using expected monetary value, what is your decision?
- b) What is the expected value of perfect information before taking the survey?
- c) Draw the complete decision tree, including the survey option.
- d) What is the expected value of perfect information after taking the survey?
- e) What is the value of the survey information?
- f) What is the best course of action?
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