BB, a marketing manager, has to decide whether to introduce a new product. If the product succeeds, the payoff is 8 (million dollars). If it fails, there will be a loss of 2 (million dollars).
a) BB estimates that the chance of the new product being a success is 0.3 and that it will be a failure 0.7. If BB is risk neutral, what should she decide?
b) BB could do test marketing which would tell her for sure whether the product is a success. How valuable is the test marketing, i.e. what is the maximum BB is willing to pay for test marketing?
c) Now suppose the test marketing is not perfect, as indicated in the table below.
The new product will really be
A success
A failure
Test marketing is
A success
0.8
0.2
A failure
0.1
0.9
Draw the decision tree and determine how much the test marketing is worth.
BB, a marketing manager, has to decide whether to introduce a new product. If the product succeeds, the payoff is 8 (million dollars). If it fails, there will be a loss of 2 (million dollars).
a) BB estimates that the chance of the new product being a success is 0.3 and that it will be a failure 0.7. If BB is risk neutral, what should she decide?
b) BB could do test marketing which would tell her for sure whether the product is a success. How valuable is the test marketing, i.e. what is the maximum BB is willing to pay for test marketing?
c) Now suppose the test marketing is not perfect, as indicated in the table below.
|
|
|
The new product will really be |
|
|
|
|
A success |
A failure |
|
Test marketing is |
A success |
0.8 |
0.2 |
|
|
A failure |
0.1 |
0.9 |
Draw the decision tree and determine how much the test marketing is worth.
