Question

For problem 15-23, suppose that before deciding whether to advertise on television, the company can test the commercial. The test costs $300,000 and has the following reliability. If sales volume would go up by $20 million, the test would indicate this with probability 0.96. It would wrongly indicate that sales would be $10 million more with probability 0.03, and wrongly indicate that sales would be $1 million more with probability 0.01. If sales would increase by $10 million, the test would indicate this with probability 0.90, and the other two (wrong) possibilities with probability 0.05 each. The test would indicate that sales would rise by $1 million with probability 0.80 if that was really to happen, and wrongly indicate the other two possibilities with probability 0.1 each. Redo the decision problem.


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  • CreatedJune 04, 2015
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