A Hollywood film producer named John Mogul is evaluating a script for a potential film. Mogul estimates that the probability of a film based on that script being a hit is .10 and the probability of it being a flop is .90. The studio accounting department estimates that if a hit, the film will make $25 million in profit, but if a flop, will lose $8 million. Before deciding whether or not to produce a film based on that script, Mogul needs to decide whether or not to hire film critic Dick Roper to evaluate the script. Over many reviews of scripts in the past, Roper film would be a hit (of the scripts) for 70% of the films (based on the scripts) that turned out to be hit and had predicted film was a flop (of the scripts) for 80% of the films (based on the scripts) that turned out to be flops. [adapted from Taylor (2004)]

(a) Assuming Roper would not charge for his review services, determine the optimal strategy based on the expected value criterion, and state its expected value (Draw and solve the Decision Tree below).

(b) Determine EVSI (with Roper regarded as the sample information).

(c) If Roper were to charge $100,000 for his review, what would be the optimal strategy and its expected value?

Answer rating: 100% (QA)

We know the following probabilities the probability of a film ... View the full answer