Hearty Western Foods, one of the nation's largest consumer products firms, is trying to decide whether it
Question:
Prior experience with nationwide marketing effors has been:
Market conditions Probability
No acceptance..................... .6
Marginal............................ .3
Success.............................. .1
If the firm decided to test market the product, the following information becomes available:
For example, if the test market results predict a success, there is a 60% chance that the nationwide marketing effort really will be a success but a 30% chance it will be marginal and a 10% chance it will have no acceptance. (a) If the firm is risk neutral, should it test market the product or not? (b) If the firm is risk averse with a utility function
U(W) = In(W + 11),
should it test market the product or not?
Step by Step Answer:
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri