A company is considering whether or not to introduce a new product. Both the revenue and the production costs of this product are uncertain. The revenue of the product will either be low ($50,000), medium ($75,000) or high ($100,000) with equal probability. The production cost will either be high ($100,000) or low ($50,000) with equal probability. Unfortunately, unless the company does a marketing study or a cost study, it will need to make a decision about launching the product before knowing what the costs or the revenues will be.

However, the company has an opportunity to perform either a cost study or a marketing study, but not both, before making a decision on launching the product. Of course, it could also choose to perform neither study before making its decision. The cost of doing each study is $5000. The cost study, if performed, will predict costs precisely, that is, whether they will be high or low. Similarly, the marketing study will predict revenue precisely, that is, whether it will be low, medium or high.

Draw a decision tree for this problem. Clearly identify all decisions, events, probabilities, and terminal values.

Doing a rollback of your tree and using expected monetary value, what should the company do?

Answer rating: 100% (QA)

Profit Table Revenue Cost High Medium Low High 0 25000 50000 Low 50000 25000 0 Profit ... View the full answer