Question

Hale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network's decision or transfer the rights for the pilot and series to a competitor for $100,000. Hale's decision alternatives and profits (in thousands of dollars) are as follows: State of Nature Decision Alternative Reject, S1 1 Year, S2 2 Years, S3 Produce pilot, d1 -100 50 150 Sell to competitor, d2 100 100 100 The probabilities for the states of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of $5,000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an unfavorable (U) review and that the following probabilities are relevant: P(F) = 0.69 P(S1|F) = 0.09 P(S1|U) = 0.45 P(U) = 0.31 P(S2|F) = 0.26 P(S2|U) = 0.39 P(S3|F) = 0.65 P(S3|U) = 0.16 Choose the correct decision tree for this problem. (i) (ii) (iii) (iv) Graph (iii) What is the recommended decision if the agency opinion is not used? What is the expected value? Enter your answer in thousands of dollars. Recommended decision Sell Expected Value = $ thousands. What is the expected value of perfect information? Enter your answer in thousands of dollars. EVPI = $ thousands. What is Hale's optimal decision strategy assuming the agency's information is used? If Favorable Produce If Unfavorable Sell What is the expected value of the agency's information? Round your answer to two decimal places. Enter your answer in thousands of dollars. EVSI = $ thousands. Is the agency's information worth the $5,000 fee? What is the maximum that Hale should be willing to pay for the information? Round your answer to two decimal places. Enter your answer in thousands of dollars. Decision No Hale should pay no more than $ thousands.

Answer 1

Answer:

Solution:

a) Right Option is Graph a. Graph a is the Correct Decision for this Problem.

b) Determining the Recommended decision if the Agency Opinion is Not Used and Calculation of the Expected Value:

Using Node 5,

c) Calculation of the Expected Value of Perfect Information:

Therefore, the Expected Value of Perfect Information is $25.

d) Determining the Hale's Optimal Deccision Strategy assuming the Agency's Information is Used:

e) Calculation of the Expected Value of the Agency Information:

f) No, maximum Hale should pay is $1,040.