Jim Sellers is thinking about producing a new type of electric razor for men.
Given the data and information as follows:
· If the market were favorable, he would get a return of $100,000.
· If the market of the new type of razor were unfavorable, he would lose $60,000.
Jim is considering using a research company to gather additional information about the market for the razor. Here are the two choices:
· A survey with Bush Marketing Research. The cost is $5,000.
· A pilot study, which is more accurate than the survey, but is also more expensive. The cost is $20,000.
Jim was advised it would be a good idea to conduct either the survey or the pilot before making decision 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 successful market without performing a survey or pilot study is 0.5
· The probability of a favorable survey result given a favorable market for razor is 0.7
· The probability of a favorable survey result given unfavorable market for razor is 0.2
· The probability of unfavorable pilot study given unfavorable market for razor is 0.9
· The probability of unfavorable pilot study given favorable market for razor is 0.2
In solving this problem, show the following steps:
1. Draw the decision tree without research study with probability values and payoffs assigned.
2. Find the revised probability needed
3. Construct the decision tree including the survey and the pilot study with probability values and payoffs assigned.
4. Compute EMVs for all the nodes.
5. What is Jim’s best decision? Make sure you cover all the possibilities in the answer.