The product manager of a large firm is faced with the decision of whether to proceed with a national marketing campaign for a new product. The monetary return from sales generated by the campaign will depend on prevailing market conditions.

The manager believes there is a 40% chance of good market conditions and a 60% chance of bad conditions. The monetary returns (in thousands of dollars) for each condition are summarized in the following:

conditions.PNG                                                                                                                              

The manager may decide to purchase the services of a marketing firm that will do a survey for $75 000. The firm claims that their results are 75% reliable. (That is, when conditions are good, they correctly identify it 75% of the time, and similarly for bad (conditions.)

Required:

a)  What is the expected value of perfect information for this problem? How do you interpret this value?

b)  Can any alternatives be eliminated? What is the optimal action under each of the strategies: Laplace, Maximin, Maximax, Minimax regret?

Transcribed Image Text:

Good Conditions Bad Conditions Market $800 -$400 Do nothing $0 $0 Good Conditions Bad Conditions Market $800 -$400 Do nothing $0 $0

Answer rating: 100% (QA)

Expected Monetary gains without the survey Maximum of the payoffs of doing the marketing campaign and doing nothing Max04800000 06400000 040 060 Max 3... View the full answer