Management of the Telemore Company is considering developing and marketing a new product. It is estimated to be twice as likely that the product would prove to be successful as unsuccessful. If it were successful, the expected profit would be $1,500,000. If unsuccessful, the expected loss would be $1,800,000. A marketing survey can be conducted at a cost of $100,000 to predict whether the product would be successful. Past experience with such surveys indicates that successful products have been predicted to successful 80 percent of the time, whereas unsuccessful products have been predicted to be unsuccessful 70 percent of the time.
a) Use Bays’ theorem for probability revision to compute the probability of new product and conditional probability for successful S1 and unsuccessful S2 (Hint: P(S|S1) = 0.8 P(U|S2) = 0.7) [6 marks]
b)Draw the corresponding decision tree for this entire problem, include all probabilities, payoffs, and expected values at each node (please show your calculations).
c)Analyze the decision tree to determine the optimal decision strategy for the Telemore Company.?
d) What is the EVPI?
e) What is the efficiency of the information?
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