A product manager at Clean & Brite (C&B) wants to determine whether her company should market a new brand of toothpaste. If this new product succeeds in the marketplace, C&B estimates that it could earn $1,800,000 in future profits from the sale of the new toothpaste. If this new product fails, however, the company expects that it could lose approximately $750,000. If C&B chooses not to market this new brand, the product manager believes that there would be little, if any, impact on the profits earned through sales of C&B’s other products. The manager has estimated that the new toothpaste brand will succeed with probability 0.50.
Before making her decision regarding this toothpaste product, the manager can spend $75,000 on a market research study. Based on similar studies with past products, C&B believes that the study will predict a successful product; given that product would actually be a success, with probability 0.75. It also believes that the study will predict a failure, given that the product would actually be a failure, with probability 0.65.
a. To maximize expected profit, what strategy should the C&B product manager follow?
b. Calculate and interpret EVSI for this decision problem.
c. Calculate and interpret EVPI for this decision problem.