A marketing executive must decide whether or not to use a new label on a product

Question

A marketing executive must decide whether or not to use a new label on a product. The firm will gain $800,000 if he adopts the new label and it turns out to be superior than the old label. The firm will lose $500,000 if the executive adopts the new label and it proves to be not superior than the old one. The firm will neither gain nor lose money if the executive sticks with the old label. The executive feels there is a 50-50 chance that the new label is superior to the old one and a 50-50 chance it is not. If he decides to take the action with the higher expected gain to the firm: should he decide to use the new label ornot?

Explanation / Answer

Return             Probability

800,000           0.50

-500,000          0.50

Expected value = 800000*0.50+(-500000)*0.50 = 300,000

Conclusion: Use the new label

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