A new product has the following profit projections andassociated probabilities:

Question

A new product has the following profit projections andassociated probabilities: Profit:                        Probability: 150,000                      0.10 100,000                     0.25 50,000                       0.20 0                                0.15 -50,000                      0.20 -100,000                    0.10 A.) Use the expected value approach to decide whether tomarket the new product. B.) Because of the high dollar values invloved; especially thepossibility of a 100,000 loss, the marketing vice president hasexpressed some concern about the use of the expected valueapproach. As a consequence, is a utility analysis is performed,what is the appropriate lottery? C.) Assume the following indifferences probabilities areassigned. Do the utilities reflect the behavior os a risk taker ora risk avoider? Profit:                      Indifference Probability 100,000                     0.95 50,000                      0.70 0                               0.50 -50,000                     0.25 D.) Use expected utility to make a recommendationdecision. E.) Should the decision maker feel comfortable with the finaldecision recommended by the analysis? A new product has the following profit projections andassociated probabilities: Profit:                        Probability: 150,000                      0.10 100,000                     0.25 50,000                       0.20 0                                0.15 -50,000                      0.20 -100,000                    0.10 A.) Use the expected value approach to decide whether tomarket the new product. B.) Because of the high dollar values invloved; especially thepossibility of a 100,000 loss, the marketing vice president hasexpressed some concern about the use of the expected valueapproach. As a consequence, is a utility analysis is performed,what is the appropriate lottery? C.) Assume the following indifferences probabilities areassigned. Do the utilities reflect the behavior os a risk taker ora risk avoider? Profit:                      Indifference Probability 100,000                     0.95 50,000                      0.70 0                               0.50 -50,000                     0.25 D.) Use expected utility to make a recommendationdecision. E.) Should the decision maker feel comfortable with the finaldecision recommended by the analysis? A new product has the following profit projections andassociated probabilities: Profit:                        Probability: 150,000                      0.10 100,000                     0.25 50,000                       0.20 0                                0.15 -50,000                      0.20 -100,000                    0.10 A.) Use the expected value approach to decide whether tomarket the new product. B.) Because of the high dollar values invloved; especially thepossibility of a 100,000 loss, the marketing vice president hasexpressed some concern about the use of the expected valueapproach. As a consequence, is a utility analysis is performed,what is the appropriate lottery? C.) Assume the following indifferences probabilities areassigned. Do the utilities reflect the behavior os a risk taker ora risk avoider? Profit:                      Indifference Probability 100,000                     0.95 50,000                      0.70 0                               0.50 -50,000                     0.25 D.) Use expected utility to make a recommendationdecision. E.) Should the decision maker feel comfortable with the finaldecision recommended by the analysis?

Explanation / Answer

A new product has the following profit projections andassociated probabilities: Profit:                        Probability: 150,000                      0.10 100,000                     0.25 50,000                       0.20 0                                0.15 -50,000                      0.20 -100,000                    0.10 A.) Use the expected value approach to decide whether tomarket the new product.

To determine the expected value of profit, you need to do asummation of each level of profit multiplied by its correspondingprobability

E(Profit) = (150000)(.10) + (100000)(.25) + (50000)(.20) + (0)(.15)+ (-50000)(.20) + (-100000)(.10)
             = 15000 + 25000 + 10000 + 0 + (-10000) + (-10000)
             = 30000

Since the expected value is relatively large, we should market theproduct.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.