Question

IMPORTANT! Please answer d, e and f as well as the last expert did not...

Jim Sellers is thinking about producing a new type of electric razor for men. If the market were favorable, he would get a return of $100,000, but if the market for this new type of razor were unfavorable, he would lose $60,000. Since Ron Bush is a good friend of Jim Sellers, Jim is considering the possibility of using Bush Marketing Research to gather additional information about the market for the razor. Ron has suggested that Jim either use a survey or a pilot study to test the market. The survey would be a sophisticated questionnaire administered to a test market. It will cost $5,000. Another alternative is to run a pilot study. This would involve producing a limited number of the new razors and trying to sell them in two cities that are typical of American cities. The pilot study is more accurate but is also more expensive. It will cost $20,000. Ron Bush has suggested that it would a good idea for Jim to conduct either the survey or the pilot before Jim makes the decision concerning whether to produce the new razor. But Jim is not sure if the value of the survey or the pilot is worth the cost. Jim estimates that the probability of a successful market without performing a survey or pilot study is 0.5. Furthermore, the probability of a favorable survey result given a favorable market for razors is 0.7, and the probability of a favorable survey result given an unsuccessful market for razors is 0.2. In addition, the probability of an unfavorable pilot study given an unfavorable market is 0.9, and the probability of an unsuccessful pilot study result given a favorable market for razors is 0.2.

a. Draw the decision tree for this problem without the probability values. Use Silver Decisions online Decision Tree software to draw the tree

b. Compute the revised probabilities needed to complete the decision, and place these values in the decision tree. In Excel, show the revised probability computations, and enter the revised probabilities (decimal places) into online Decision Tree then complete the analysis.

c. What is the best decision for Jim? Use EMV as the decision criterion

d. Compute the EVPI relative to no survey or pilot study.

e. What is the expected value of sample information and its efficiency for the Survey? f. What is the expected value of sample information and its efficiency for the Pilot Study?

Answer 1

Answers:

a. According to the Decision Tree Option I is the better decision for Jim Sellers as he earning a net income of $ 28,000 which is higher when compare with Options ii & iii.

b. The value if Questionnaire method is adopted will be $ 22,888 after deducting the cost of $ 5000.

c. The value if Pilot method is adopted will be $ 8,538 after deducting the Cost of $ 20,000.