Question: FUN WI TH DECISION ANALYSIS

Your firm is considering entering a new geographic market. It is unclear how successful

your product would be in that market.

To enter this market, you must invest $2,000,000 on initial advertising. After investing in

the advertising, the amount of product you actually sell will depend on the level of

demand for your product. If the "high" level of demand is realized, then the "operating

profit" (revenues less operating cost) will be $2,800,000. If the "medium" or "low"

demand levels are realized, your "profit" will be $2,000,000 and $1,000,000 respectively.

These profit estimates do not account for the initial advertising expenditure. The probably

of each of these three demand levels being realized is low (35%), medium (30%) and

high (35%).

1. Outline the above-described situation as a decision-tree. Using the EMV
   criterion, solve the tree and lay out a recommendation for the company?
2. Outline the conditions under which use of the EMV criterion is appropriate. In
   other words, how can we defend EMV as the appropriate decision rule.
3. Assume that you discover that your estimate of the profit from selling the new
   product if demand is "high" was too low. How much would the revenue for "high
   demand" have to rise in order for you to change your decision?
4. Alternatively, assume that you are able to purchase some marketing research that

would tell you "upfront" what the level of demand would be. What is the most

that you would be willing to pay for this information?

Price: $2.99

Solution: The downloadable solution consists of 3 pages
Deliverable: Word Document