# Question: A company is considering whether to market a new product

A company is considering whether to market a new product. Assume, for simplicity, that if this product is marketed, there are only two possible outcomes: success or failure. The company assesses that the probabilities of these two outcomes are p and 1 - p, respectively. If the product is marketed and it proves to be a failure, the company will have a net loss of $450,000. If the product is marketed and it proves to be a success, the company will have a net gain of $750,000. If the company decides not to market the product, there is no gain or loss. The company is also considering whether to survey prospective buyers of this new product. The results of the consumer survey can be classified as favorable, neutral, or unfavorable. In similar cases where proposed products were eventually market successes, the fractions of cases where the survey results were favorable, neutral, or unfavorable were 0.6, 0.3, and 0.1, respectively. In similar cases where proposed products were eventually market failures, the fractions of cases where the survey results were favorable, neutral, or unfavorable were 0.1, 0.2, and 0.7, respectively. The total cost of administering this survey is C dollars.

a. Let p = 0.4. For which values of C, if any, would this company choose to conduct the consumer survey?

b. Let p = 0.4. What is the largest amount that this company would be willing to pay for perfect information about the potential success or failure of the new product?

c. Let p = 0.5 and C = $15,000. Find the strategy that maximizes the company’s expected earnings in this situation. Does the optimal strategy involve conducting the consumer survey? Explain why or why not.

a. Let p = 0.4. For which values of C, if any, would this company choose to conduct the consumer survey?

b. Let p = 0.4. What is the largest amount that this company would be willing to pay for perfect information about the potential success or failure of the new product?

c. Let p = 0.5 and C = $15,000. Find the strategy that maximizes the company’s expected earnings in this situation. Does the optimal strategy involve conducting the consumer survey? Explain why or why not.

**View Solution:**## Answer to relevant Questions

The U.S. government is attempting to determine whether immigrants should be tested for a contagious disease. Assume that the decision will be made on a financial basis. Furthermore, assume that each immigrant who is allowed ...Pizza King (PK) and Noble Greek (NG) are competitive pizza chains. PK believes there is a 25% chance that NG will charge $6 per pizza, a 50% chance NG will charge $8 per pizza, and a 25% chance that NG will charge $10 per ...One controversial topic in basketball (college or any other level) is whether to foul a player deliberately with only a few seconds left in the game. Specifically, consider the following scenario. With about 10 seconds left ...A manufacturer must decide whether to extend credit to a retailer who would like to open an account with the firm. Past experience with new accounts indicates that 45% are high-risk customers, 35% are moderate risk ...The ending of the game between the Indianapolis Colts and the New England Patriots (NFL teams) in Fall 2009 was quite controversial. With about two minutes left in the game, the Patriots were ahead 34 to 28 and had the ball ...Post your question