Question

Hale’s TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network’s decision or transfer the rights for the pilot and series to a competitor for $100,000. Hale’s decision alternatives and profits (in thousands of dollars) are as follows:

		State of Nature
Decision Alternative	Reject,	1 Year,	2 Years,
Produce pilot,	−100	50	150
Sell to competitor,	100	100	100

The probabilities for the states of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of $5000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an unfavorable (U) review and that the following probabilities are relevant:

P(F) = 0.69       P(S1 | F) = 0.09   P(S1 | U) = 0.45
P(U) = 0.31       P(S2 | F) = 0.26   P(S2 | U) = 0.39
                          P(S3 | F) = 0.65   P(S3 | U) = 0.16

Q: What is the recommended decision if the agency opinion is not used? What is the expected value?

• A. Buy, $150
• B. Sell, $100
• C. Sell, $150
• D. Buy, $100

Answer 1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

Let us compute both the decisions to produce pilot and to selll to the competitor

=> PRODUCE PILOT = -100 * 0.2 + 0.3 * 50 + 0.5 * 150 = 70,000

=>SELL TO COMPETITOR = 100,000

So, the recommended decision is to SELL TO COMPETITOR 100,000, as the expected value of sell to the competitor is higher than to produce pilot.

Hence option B