Question

The Bolt Beverages Company must decide whether or not to introduce a new sparkling drink. Management feels that if it pushes through with introducing the sparkling drink, it will yield a profit of $1 million if sales are around 100 million, a profit of $200,000 if sales are around 50 million, or it will lose $2 million if sales are only around 1 million bottles. If Bolt Beverages Company does not market the new sparkling drink, it will suffer a loss of $400,000.

1. The management is taking a pessimistic view. It is to the company's best interest to introduce the new sparkling drink.

ture or false

2. The management is taking a pessimistic view. It is to the company's best interest to introduce the new sparkling drink.

ture or false

3. The management wants to minimize regret. It is to the company's best interest not to introduce the new sparkling drink.

ture or false

4.  Refer to the question above on Bolt Beverages.

The marketing department has found out that:

P (100 million in sales) = 1/3; P(50 million in sales) = 1/2; P(1 million in sales) = 1/6.

Should Bolt Beverages introduce the new sparkling drink?

Yes, introduce the drink. The EMV is approximately $1 million

Yes, introduce the drink. The EMV is approximately $267,000

Yes, introduce the drink. The EMV is approximately $100,000

No, do not introduce the drink. The EMV is approximately ($400,000).

Answer 1

1. A pessimist decision maker will choose the best of worst decisions. In this case, the worst payoff in case I ( making the drink) is -1M, while that in case II ( not producing) is 40000. Therefore the case II is the right choice, which is not to produce the drink.

decision / SON 100M 50M 1M
Produce 1000000 200000 -2000000
Don't produce -400000 -400000 -400000
2, Under optimistic decision making the choice will be Maximax that is maximum of maximum which is 1000000, that is to produce the drink.

3. Regret table

decision / SON 100M 50M 1M
Produce 0 0 -1600000
Don't produce 1400000 600000 0
Under Minimax regret decision, the min ( max regret ) will be used which is Min ( 0. 1400000) =0

which is to produce the drink.

4. Under EMV criteria

EMV of producing = 1/3 x1000000+1/2x200000+1/6(-2000000) = 333333+100000-333333 =100000

EMV of not producing =-400000

The decision should be to introduce the drink.

*Note: Please comment below if you have any doubts.