A company is considering introducing a new product. The basic decisions are to produce the product in mass volume, medium volume, or do not produce it at all. For market research, they have the option of conducting a pilot study at a cost 9,000,which can turn out to be successful or unsuccessful, with an equal chance. The company can expect to make 300,000 and 200,000, respectively, from mass and medium production if the market is favourable. However, if the market is unfavourable, they estimate that they would lose 90,000 and 30,000 with mass and medium production, respectively. The probability of a favourable market given a successful pilot study is 0.7. The probability of an unfavourable market given an unsuccessful pilot study result is estimated to be 0.8. Of course, the company could go ahead with the basic decisions without conducting the pilot study. In this case, the y estimate that the probability of a successful market is 0.7.In your booklet for rough work, draw a decision tree for the above problem and show all the various alternatives available to this company. You should show all profit/loss for each branch of the decision tree and your calculations (the Expected Monetary Values) for each decision and chance node by considering costs at the end of each branch and not on each branch (i.e., you should use method 1, not method 2, for drawing your decision tree).

21. The steps involved in solving decision trees are:

a) Draw out the decision tree, from left to right; Write the cost of a decision alongside each decision branch; Calculate the EMV at the chance nodes, from right to left; Find the best decision route by making decisions at every decision node.

b) Draw out the decision tree, from right to left; Write the cost of a decision along side each decision branch; Calculate the best decision route at every decision node, from right to left; Find the EMV at the chance nodes.

c) Draw out the decision tree, from left to right; Write the cost of a decision along side each decision branch; Calculate the best decision route at every decision node, from right to left; Find the EMV at the chance nodes.

d) Draw out the decision tree, from right to left; Write the cost of a decision along side each decision branch; Calculate the EMV at the chance nodes, from right to left; Find the best decision route by making decisions at every decision node.

22. Considering the Decision Tree you drew above, the number of decisions available to the company at the beginning is:

a) 3

b) 6

c) 4

d) 5

23. The number of decision boxes on the entire decision tree is:

a) 2

b) 3

c) 6

d) 5

24. The number of chance nodes on the entire decision tree is:

a) 6

b) 4

c) 9

d) 7

25. The number of branches on the entire decision tree is:

a) 24

b) 22

c) 20

d) 27

26. The expected monetary values (EMV) for the chance nodes on the no pilot studybranch, in thousands of Pounds, are:

a) 131, 183

b) 46, 28

c) 66, 34

d) 122, 203

27. The expected monetary values (EMV) for the chance nodes on the pilot studybranch, in thousands of Pounds, are:

a) 69, 38, 73, -6, -23

b) 87, -129, 190, 21, 29

c) 90, 186, 35, 12, -43

d) 90.5, 122, 174, 7, -21

28. The companys best financial outcome on the decision tree, in thousands ofPounds, is:

a) 46

b) 66

c) 183

d) 203

29. The recommended decision to the company should be:

a) Conduct pilot study; if the outcome is successful, mass produce; if the outcome is unsuccessful, medium produce

b) Mass produce from the start without conducting pilot study

c) Conduct pilot study; if the outcome is successful, medium produce; if the outcome is unsuccessful, mass produce

d) Medium produce from the start without conducting pilot study

30. The major difficulty with decision analysis is to:

a) Be able to draw decision trees for single-stage decision criteria

b) Realistically estimate the financial outcomes and the probabilities for each state of nature

c) Be able to apply single-stage decision criteria on decision trees

d) Calculate the average probabilities for each decision pathway