A firm is deciding whether or not to market a new product It

A firm is deciding whether or not to market a new product. It believes the probability the product will be a success is 0.40 and the probability the product will be a failure is 0.60. If the product is successful the company will earn $750,000. If the product is a failure then the company will lose $450,000.

To obtain better information about the product\'s success, they can contract with a market research company to conduct a survey for a cost of $50,000. The survey results will be favorable, neutral, or unfavorable. Based on past performance of this market research company, the following is known:

Successful products tend to get favorable results in surveys 60% of the time, neutral results 30% of the time, and unfavorable results 10% of the time.

Similarly, products that end up having failed tend to get favorable survey results 10% of the time, neutral results 20% of the time, and unfavorable results 70% of the time.

a)How do you construct this precision tree?

b)Assume the contract has been doubled to $100,000. Perform a two-way sensitivity analysis on the decision to conduct the survey using the probability of success and the total cost of the contract. Which of the following statements is true?

Solution

From the given information, we construct a precision tree as follows,

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B. Conduct the survey if the probability of success is 0.50 and the contract cost is $140,000