Hale\'s TV Productions is considering producing a pilot for a comedy series in t
ID: 465586 • Letter: H
Question
Hale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network's decision or transfer the rights for the pilot and series to a competitor for $150,000. Hale's decision alternatives and profits (in thousands of dollars) are as follows:
The probabilities for the states of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of $20,000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an unfavorable (U) review and that the following probabilities are relevant:
Choose the correct decision tree for this problem.
What is the recommended decision if the agency opinion is not used? What is the expected value? Enter your answer in thousands of dollars.
Recommended decision
Expected Value = $ thousands.
What is the expected value of perfect information? Enter your answer in thousands of dollars.
EVPI = $ thousands.
What is Hale's optimal decision strategy assuming the agency's information is used?
If Favorable
If Unfavorable
What is the expected value of the agency's information? Round your answer to two decimal places. Enter your answer in thousands of dollars.
EVSI = $ thousands.
Is the agency's information worth the $20,000 fee? What is the maximum that Hale should be willing to pay for the information?
Decision
Hale should pay no more than $ thousands. Round your answer to two decimal places. Enter your answer in thousands of dollars.
What is the recommended decision?
Explanation / Answer
1) The correct decision tree for the problem is the one shown in option iv).
The same figure is referenced for all subsequent answers. All c alculations are in thousands of dollars. Also, note that for all questions,
P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50
2) If agency opinion is not used, we explore node 5.
EV (node 10) = 0.2 (-100) + 0.3 (50) + 0.5 (250) = $120
EV (node 11) = 0.2 (150) + 0.3 (150) + 0.5 (150) = $150
The recommended decision is to sell to the competitor with an EV of 150 thousand dollars.
3) EVwPI (expected value with perfect information about the states of nature)
= 0.2 (150) + 0.3 (150) + 0.5 (250) = 200
EVPI = 200 - 150 = $50 thousand
4) If the agency is chosen,
In case of favourable,
EV (node 6) = .06(-100) + 0.28 (50) + 0.66 (250) = 173
EV (node 7) = 0.06 (150) + 0.28 (150) + 0.66 (150) = 150 = 150
EV (node 3) = Max {173, 150} = 173
Thus the decision is to produce and wait for the first firm's decision
In case of unfavourable,
EV (node 8) = 0.42 (-100) + 0.34 (50) + 0.24 (250) = 35
EV (node 9) = 0.42 (150) + 0.34 (150) + 0.24 (150) = 150
EV (node 4) = Max {35, 150} = 150
Thus, the decision is to sell the pilot
5) EV (node 2) = 0.64 (173) + 0.36 (150) = 164.72
Expected Value of Sample information, EVSI = 164.72 - 150 = $ 14,720
6) No, the agency's cost of 20, 000 is not worth it.
The maximum that Hale should be paying for the agency's information is $ 14, 720
7) Thus the recommended decision is not to use the agency and to sell the pilot to the competitor.
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