Part 3: Value of the Market Study (USING DATA TREES FROM DADM IN EXCEL)

A product manager at Clean & Brite (C&B) wants to determine whether her company should market a new brand of toothpaste. If this new product succeeds in the marketplace, C&B estimates that it could earn $1,800,000 in future profits from the sale of the new toothpaste. If this new product fails, however, the company expects that it could lose approximately $750,000. If C&B chooses not to market this new brand, the product manager believes that there would be little, if any, impact on the profits earned through sales of C&Bs other products.

The manager has estimated that the new toothpaste brand will succeed with probability 0.50. Before making her decision regarding this toothpaste product, the manager can spend $75,000 on a market research study. Based on similar studies with past products, C&B believes that the study will predict a successful product, given that product would actually be a success, with probability 0.75. It also believes that the study will predict a failure, given that the product would actually be a failure, with probability 0.65.

For the following questions, you will need to do the Bayes calculations to get the correct probabilities for success and failure conditional upon the market study prediction.

All of the probabilities you need to get started are given in the problem statement.

What is the probability that the market study predicts a successful product launch? Enter your answer as a probability between 0 and 1 and round to 2 decimal places. (for example, a chance of 38.7% would be entered as the probability 0.39)

If the market study predicts a successful launch, what is the new probability that the product will actually be successful? Enter your answer as a probability between 0 and 1 and round to 2 decimal places. (for example, a chance of 38.7% would be entered as the probability 0.39)

What is the value of the market study information? Ignore the $75,000 cost and compare it to the expected value of not doing the study. Enter your answer in dollars, rounded to the dollar.

What is the expected value of doing the market study? Hint: this should include the $75,000 cost of the market study. Enter your answer in dollars, rounded to the dollar.

Is the market study worth paying $75,000 for? (yes/no)