Question: Canzano Home Products is trying to assess the likelihood that
Canzano Home Products is trying to assess the likelihood that its proposed new “Royal Family” product line will be successful. The plan is to develop the new line ONLY if its probability of success appears to be more than 60%. The company believes that the new line’s success will be linked to two principal factors-- general economic conditions over the next two years and the behavior of its principal competitor. If the economy “booms,” you believe there is an 80% probability that the competitor will introduce a competing product line. If the economy “advances moderately” that probability drops to 40%, and if the economy “declines signifcantly” the probability falls to only 10%. Based on Canzano’s best analysis, the company believes that the economy is most likely to “advance moderately” over the next two years (probability .6), but it also assigns a probability of .3 that the economy will “boom,” and a .1 probability that the economy will “decline signifcantly”. If Canzano’s competitor introduces its competing product line in a booming economy, the company estimates that it is 70% likely that its own Royal Family line will be successful. On the other hand, if the competitor introduces its competing line in a declining economy, Canzano’s proposed new line is given only a 1-in-5 chance of succeeding. If the competitor introduces its product line in a moderately advancing economy, Canzano believes that there is a 40% chance that its new line would succeed. Finally, if the competitor decides NOT to introduce its competing line at all, Canzano anticipates an 80% chance that its Royal Family line will be successful, irrespective of the economy. Should Canzano proceed with plans to develop the new product line?
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