Gala Inc. is deciding whether to develop a new app for the iPhone X. The decisio

Question

Gala Inc. is deciding whether to develop a new app for the iPhone X. The decision tree below shows that the expected value for the develop alternative is 20 Success 0.4 Develop 0.6 Fail 100 Not Develo Suppose a survey is available from Golden Delicious Corp. that indicates whether the new app will be a success or fail in the market. The accuracy of this survey is PCSuccess" | Success)- 0.8 and P(Fail" | Fail) 0.7 "Success" 32 Success 0.32 Success 0.8 0.2 Fallure 0.3 "Success0.64 0.4 0.5 Fallure o.18 Success_0.08 Falilure" 0.08 0.36 "Success 0.18 Fallure" 0.16 0.6 0.5 Fallure 0.42 0.42 Determine the amount Golden Delicious would be willing to pay for the survey b) 26 c) 36 d) 46 e) None of the above

Explanation / Answer

Expected payoff before the survey = 0.4*200 - 100*0.6 = 80 - 60 = $20

From the second tree diagram we can find the

P("success"/success) = 0.32/0.5 = 0.64

P("Failure"/failure) = 0.42/0.5 = 0.84

P("success"/failure) = 0.18/0.5 = 0.36

P("Failure"/failure) = 0.8/0.5= 0.16

So My final decision will be to to develop if the survey says to develop

So Expected value with survey = P("Success")*(200*P(success/"Success") - 100*P(failure/"success")) -P("failure)*0

=0.5*(200 *0.64 - 100*0.36) - 0 = 46

Thus we should be willing to pay 46 - 20 = $26 for the survey

Option b)

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