1. A company developed a promising product and wants to make a decision. Based on the best available information by a consultant, a simplified version of a decision tree is drawn as below. While all payoff values are positive, it expects losing $1million if it decides to "develop product - produce and market" and "low market" occurs.

a) Calculate expected value at every node.

b) If they "lease for royalty to company A", how much can it expect?

c) What is the optimum decision?

d) If their risk tolerance is $0, what is the best decision and resulting expected value?

Transcribed Image Text:

Develop Product Sell Idea Lease for Royalty Produce & Market Sell Idea Company A Company B (.6) Large Market (.4) Low Mkt. (.6) Large Market (.4) Low Mkt. (.6) Large Market (.4) Low Mkt. (.6) Large Market (.4) Low Mkt. Payoff ($ millions) 7.0 -1.0 4.0 2.0 3.2 2.2 3.5 0.3 2.0 Develop Product Sell Idea Lease for Royalty Produce & Market Sell Idea Company A Company B (.6) Large Market (.4) Low Mkt. (.6) Large Market (.4) Low Mkt. (.6) Large Market (.4) Low Mkt. (.6) Large Market (.4) Low Mkt. Payoff ($ millions) 7.0 -1.0 4.0 2.0 3.2 2.2 3.5 0.3 2.0

Answer rating: 100% (QA)

a Calculate Expected Value at Every Node L For Develop Produce Market Expecte... View the full answer