Hearty Western Foods, one of the nation's largest consumer products firms, is trying to decide whether it should spend $5 million to test market a new ready-to-eat product (called Kidwich), to proceed directly to a nationwide marketing effort, or to cancel the product. The expected payoffs (in millions of dollars) from cancellation versus nationwide marketing are given below:

Prior experience with nationwide marketing effors has been:
Market conditions Probability
No acceptance..................... .6
Marginal............................ .3
Success.............................. .1
If the firm decided to test market the product, the following information becomes available:

For example, if the test market results predict a success, there is a 60% chance that the nationwide marketing effort really will be a success but a 30% chance it will be marginal and a 10% chance it will have no acceptance. (a) If the firm is risk neutral, should it test market the product or not? (b) If the firm is risk averse with a utility function
U(W) = In(W + 11),
should it test market the product or not?

Transcribed Image Text:

Action Market Conditions Cancel Go Nationwide No acceptance Marginal Success 10 10 80 Probability No Acceptance Marginal Success Outcome Predicted by the Test Market No Acceptance Marginal Success .2 3