Your company must decide whether or not to introduce a new product. The sales of the product will be either at a high level (a success) or quite low (a Hop). The conditional value for this decision is as follows:

Your company has the option to conduct a market survey to better ascertain the true market demand. The survey will cost $0.2M. The survey does not provide perfect information about the sales, but there are three possible outcomes from the survey: (1) the survey may predict success (high sales) for the new product; (2) the survey may predict that the new product will fail (low sales); or (3) the survey result may be inconclusive. You are given the following notation and information:
Conditional Probabilities of Survey Predictions, Given Potential Sales

To evaluate the economic worth of the survey, answer the following questions.
(a) Based on expected monetary value, what is your decision before taking the survey?
(b) What is the expected value of perfect information before taking the survey?
(c) Draw the complete decision tree diagram with the survey option.
(d) What is the expected value of perfect information after you have taken the survey?
(e) What is the worth of the survey information?
(f) What is the best course of action?

Transcribed Image Text:

States of Nature High Sales Low Sales Decisiorn Introduce product Do not introduce product Probability S2M 0 0.7 S4M 0.3 Potential Level of Sales Low Sales Market Survey Results (Survey prediction) High Sales 0.4 0.4 0.2 0.1 0.5 0.4 Survey predicts high sales (S) Survey inconclusive (D) Survey predicts low sales (F)