Corporation Inc Research and Development team finished the p

Corporation Inc Research and Development team finished the prototype of a new car called the e car. Management is deciding when to release this product to the ntaional market. Among Corporation Inc\'s past products, 60% were a success in the national market (40% failed). The estimation is that if e car succeeds in the national market, then it generate Corporation Inc $5 Million in profit. However, if e car fails in the national market, then it Coporation Inc will experience a $2 million loss.

1. What is Corporation Inc\'s estimated payoff for releasing e car to the US market?

2. What is the maximum amount that Corporation Inc would be willing to pay to gain market information? Hint: Use Expected value of perfect information.

Solution

1.

Estimated payoff = P(success)*payoff in success -P(failure)*loss in failure

Estimated payoff = 0.6*$5million -0.4*$2million = $2.8million

Thus the estimated payoffs for releasing e car to the US market s $2.8 million.

2.

Expected value given perfect Information = $5 million

Expected value of perfect information = $5 million - $2.8 million = $2.2 million .

Thus the corporation Inc. will be willing to pay a maximum of $2.2 million to gain market information.