Homework SourseA new product has the following profit projections and assoc
A new product has the following profit projections and associated probabilities:
0.10
a. Use the expected value approach to decide whether to market the new product.
b. Because the high dollar values involved, especially that possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery?
c. Assume that the following indifference probabilities are assigned. Do the utilities reflect the behavior of a rish taker or a risk avoider?
d. Use the expected utility to make a recommended decision.
e. Should the decision maker feel comfortable with the final decision recommended by the analysis?
| Profit | Probability |
|---|---|
| $150,000 | 0.10 |
| $100,000 | 0.25 |
| $50,000 | 0.20 |
| $0 | 0.15 |
| -$50,000 | 0.20 |
| -$100,00 | 0.10 |
Solution
To decide whether to launch a new product or not, calculate the expected profit by sum of profit (probability)
As expected value or average is positive 30000, it is advisable to launch the new product.
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Utility approach
While profit difference is the same 50000, prob is the least from 50000 units to 0
Hence 50000 units is better.
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| Profit | Probability | Profit*prob |
| $150,000 | 0.1 | $15,000 |
| $100,000 | 0.25 | $25,000 |
| $50,000 | 0.2 | $10,000 |
| $0 | 0.15 | $0 |
| ($50,000) | 0.2 | ($10,000) |
| ($100,000) | 0.1 | ($10,000) |
| Mean | $30,000 | |
