Super Cola is considering the introduction of a root beer drink. The company fee
ID: 394885 • Letter: S
Question
Super Cola is considering the introduction of a root beer drink. The company feels that the probability that the product will be a success is .6. The payoff table is as follows:
The company could hire a market research company that, in similar situations in the past, gave one of two types of reports: favorable or unfavorable. You can assume that P(favorable| s1) = .7 and P(favorable | s2) = .4. The company would charge 5,000 for the report.
Question: What is the maximum amount of money that Super Cola should spend to get more information about the possibility of a successful product introduction?
Success (s1) Failure (s2) Introduce (d1) 250,000 -300,000 Do Not Introduce (d2) 0 0Explanation / Answer
Payoff for the event without report
= 0.6x250000-0.4x300000 = 30000
It is assumed that the chances of a favourable or unfavourable reports are equal.
Payoff with report +5000= 0.5[P(favourable/s1) x250000 - ( 1 -Pfavorable /s1) x300000 ]+ 0.5x[(Pfavourable /s2) x( -300000) + { 1-(pfavourable/s2)} x ( 250000) ]
=0.5x [175000-90000-120000+150000 ]
Payoff with report = 0.5 x( 115000) -5000
= 52500
The company can pay ( 52500-30000) = 22500 more to get the relevant information about possibility for successful product information.
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