Question

15.3-11. Management of the Telemore Company is considering developing
and marketing a new product. It is estimated to be twice
as likely that the product would prove to be successful as unsuccessful.
It it were successful, the expected profit would be
$1,500,000. If unsuccessful, the expected loss would be
$1,800,000. A marketing survey can be conducted at a cost of
$300,000 to predict whether the product would be successful. Past
experience with such surveys indicates that successful products
have been predicted to be successful 80 percent of the time, whereas
unsuccessful products have been predicted to be unsuccessful 70
percent of the time.
(a) Develop a decision analysis formulation of this problem by
identifying the alternative actions, the states of nature, and the
payoff table when the market survey is not conducted.
T (b) Assuming the market survey is not conducted, use Bayes’
decision rule to determine which decision alternative should
be chosen.
T (c) Find EVPI. Does this answer indicate that consideration
should be given to conducting the market survey?
T (d) Assume now that the market survey is conducted. Find the
posterior probabilities of the respective states of nature for
each of the two possible predictions from the market survey.
(e) Find the optimal policy regarding whether to conduct the market
survey and whether to develop and market the new product.

Answer 1