2. A con sumer electronics company is planning to introduce a new device, consid

Question

2. A con sumer electronics company is planning to introduce a new device, consideration of costs, (e &. there is a fixed cost of $5 million for projected state of the economy, etc, the marketing manager $5 million for developing the t item), the with the following payoff the marketing manager came up table (in $millions) Event Introduction successful Introduction not successful $40 Courses of action Market item $50 Do not market item a. What are the decisions? b. What are the states of nature? c. What decision criterion would a conservative decision-maker make? Use your answer in c. to determine what decision should be made in this case. Show all work to justify your answer d. e. What decision criterion would an optimistic decision-maker make?

Explanation / Answer

a) Decisions are 1) Market item

2) Don't market the item

b) States of nature

1) Introduction is successful

2)Intrduction si not successful

c) Conservative - (Maximin) or (Pessimist)

The maximin person looks at the worst that could happen under each action and then choose the action with the largest payoff. They assume that the worst that can happen will, and then they take the action with the best worst case scenario. The maximum of the minimums or the "best of the worst".

d)

max(-5,-40 ) = -5 hence don't market

e)

Maximax (Optimist)

The maximax looks at the best that could happen under each action and then chooses the action with the largest value. They assume that they will get the most possible and then they take the action with the best best case scenario. The maximum of the maximums or the "best of the best". This is the lotto player; they see large payoffs and ignore the probabilities.

f)

max(50,-5) = 50

hence market

Post rest questions again

market don't market Successful 50 -5 Not successful -40 -5 minimum -40 -5

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