Suzan just finished a new movie script.  Paramount offers to buy the script, for either:

 (a) $1,750,000 

 (b) 4% of the movie's profits.  

There are three decisions the studio will have to make.  The first is to decide if the script is good or bad, and the second is if the movie is good or bad, and the third is advertising. There is a 60% the script is terrible.  If the script is bad, the studio does nothing. If the script is good, the studio will shoot the movie. After the movie is shot, the studio will review it, and a 40% chance the movie is good.  If the movie is terrible, it will go directly to the company's streaming service and earn $25 million.  If the movie is really good, there is a 40% chance the company will advertise heavily and earn a net present value of $500 million.  If the movie is good, there is a 60% chance the company will do minimal advertising and earn a net present value of $100 million.

 

Calculate the expected profit of this film. 

Calculate Suzan's payoff if she chooses Option B.

Answer rating: 100% (QA)

To calculate the expected profit of the film we need to calculate the probabilities of each scenario ... View the full answer