Question

Q1. 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: Decision Alternative Produce Pilot, d1 Sell to competitor, d2 Reject, s1 -50 100 1 Year, s2 120 100 2 year, s3 200 100 State of Nature The probabilities for the states of nature are P(s1) = 0.20, P(s2) = 0.50, and P(s3) = 0.30. 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. a. Use a decision tree to recommend a decision. b. Use EVPI to determine whether Hale should attempt to make a better decision. c. A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F | s1) = 0.80 P(F | s2) = 0.25 P(F | s3) = 0.60 P(U | s1) = 0.20 P(U| s2) = 0.75 P(U | s3) = 0.40 What is the probability that the market research report will be favorable and Unfavorable? d. What is Hale’s optimal decision strategy? e. What is the expected value of the market research information? f. What is the efficiency of the information?

Answer 1