National Foods has developed a new sports beverage it would like to advertise on Super Bowl Sunday. National’s advertising agency can purchase one, two or three 30-second commercials advertising the drink and estimates that the return will be based on Super Bowl viewership. Viewership, in turn, is based on fans’ perception of whether the game is “dull”, “average”, “above average”, or “exciting”. National Foods’ advertising agency has constructed the following payoff table giving its estimate of the expected profit resulting from purchasing one, two, or three advertising sports. Another possible decision is for National Foods not to advertise at all during the Super Bowl. The states of nature correspond to the game being “dull”, “average”, “above average”, or “exciting”.

Perceived Game Excitement
Dull	Average	Above Average	Exciting
One	13	23	7	11
Two	-11	37	12	18
Three	-27	5	27	22

1. What type of decision making environment is National Foods advertising manager subjected to, in this problem?

2. What is the optimal decision if the National Foods advertising manager is optimistic?

3. What is the optimal decision if the National Foods advertising manager is pessimistic?

4. What type of decision technique should be used, if National Foods advertising manager has an affinity to take risk or avoid risk, but not a fully optimistic or pessimistic decision maker?

5. What is the optimal decision if the National Foods advertising manager wishes to minimize the firm’s maximum regret?

Based on the past Super Bowl games, suppose the decision-maker believes that the following probabilities hold for the states of nature:

P (Dull game) = 0.20, P (Average Game) = 0.40, P (Above Average Game) = 0.30, P(Exciting Game) = 0.10

6. Which decision will minimize the expected cost of advertising the commercials?

7. Which decision will minimize the expected opportunity loss of National Foods?

8. What is the maximum amount of money that should be paid by National Foods for the perfect forecast of the number of commercials that need to be purchased?

Answer rating: 100% (QA)

1 The National Foods advertising manager is subjected to a decision making environment where there i... View the full answer