PROBLEM:

A CEO is 90% sure that the Financial VP of the company transmits secrets to competitors. She does not know what is better: to fire or not the VP

If the CEO fires the VP and he is an informer, the company will be better off with $500,000. However, if the VP is fired but is not an informer, the company looses $2,500,000 (loosing his expertise) and still remains with an informer. If the CEO decides not to fire the VP, she estimates that the company will loose $1,500,000, either the VP is an informer or not.

Before making a decision, the CEO is thinking about a lie detector test for all the employees. The test costs $150,000, and its accuracy is 95% for liars and only 85% for non-liars.

1. What strategy should the CEO choose in order to minimize the expected total cost?
2. Should the CEO order a lie detector test for all employees?
3. Determine the maximum amount of money that the CEO will be willing to pay for the lie detector test.

Price: $8.41

Solution: The downloadable solution consists of 4 pages, 441 words and 2 charts.
Deliverable: Word Document