The following payoff table for a new film has been determine

The following payoff table for a new film has been determined
by the management of a motion picture studio. (Adapted from
“Holloway, Charles A., Decision Making Under Uncertainty: Models and
Choices, Prentice Hall, Inc., 1979”).
Result
“A”: Distribute
in Theatres
Sell to TV
Network
“B”: Distribute
DVDs only
Success $5,000,000 $1,000,000 $3,000,000
Failure $2,000,000 $1,000,000 $1,000,000
The probability of a success has been judged at .30. The studio plans a
series of sneak previews. Historically, it has been found that favorable
previews have been obtained for 70% of all ultimately successful films previewed,
while unfavorable previews have resulted for 80% of the failures subjected
to such experimentation.
Model the motion picture studio’s decision problem by using a decision tree.
If the sneak preview results in a net cost of $10,000, would you recommend it
be taken? (Assume that choices are based on expected values.)

Solution