FineHair is developing a new product to promote hair growth in cases of male pattern baldness. If FineHair markets the new product and it is successful, the company will earn $1,000,000 in additional profit. If the marketing of this new product proves to be unsuccessful, the company will lose $350,000 in development and marketing costs. In the past, similar products have been successful 30% of the time. At a cost of $50,000, the effectiveness of the new restoration product can be thoroughly tested. In past tests on similar products, the test predicted success on 70% of products that were ultimately successful, and it predicted failure on 75% of products that were ultimately failures.
a. Identify the strategy that maximizes Fine Hair’s expected net earnings in this situation.
b. Calculate and interpret EVSI for this decision problem.
c. Calculate and interpret EVPI for this decision problem.