CL Electronics has to decide between bringing one of two projects to market. The first product...

 

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CL Electronics has to decide between bringing one of two projects to market. The first product is a combination telephone and TV. The second product is an iPod clone. Either could be used for watching 15,053 podcasts. Jasmin asked her employees what they thought about the products. Based on their responses, she believes the following. • iPod clone :0.4 chance of losing $40 million; 0.6 chance of gaining $100 million • Phone/TV : 0.5 chance of gaining $50 million; 0.5 chance of gaining $60 million 1. Please draw a decision tree for the above situation. Specify the expected value for this tree. (Assume risk neutral) 2. If you are a risk-averse person, what option will you choose? 3. Jasmin can hire a Professor in Marketing to find out whether the iPod clone will be successful. Suppose that the professor will give perfect information on whether or not there will be a loss. How much is this information worth to CL Electronics? CL Electronics has to decide between bringing one of two projects to market. The first product is a combination telephone and TV. The second product is an iPod clone. Either could be used for watching 15,053 podcasts. Jasmin asked her employees what they thought about the products. Based on their responses, she believes the following. • iPod clone :0.4 chance of losing $40 million; 0.6 chance of gaining $100 million • Phone/TV : 0.5 chance of gaining $50 million; 0.5 chance of gaining $60 million 1. Please draw a decision tree for the above situation. Specify the expected value for this tree. (Assume risk neutral) 2. If you are a risk-averse person, what option will you choose? 3. Jasmin can hire a Professor in Marketing to find out whether the iPod clone will be successful. Suppose that the professor will give perfect information on whether or not there will be a loss. How much is this information worth to CL Electronics?

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