A television network earns an average of $1.6 million each season from a hit program and loses an average of $400,000 each season on a program that turns out to be a flop. Of all programs picked up by this network in recent years, 25% turn out to be hits and 75% turn out to be flops. At a cost of C dollars, a market research firm will analyze a pilot episode of a prospective program and issue a report predicting whether the given program will end up being a hit. If the program is actually going to be a hit, there is a 90% chance that the market researchers will predict the program to be a hit. If the program is actually going to be a flop, there is only a 20% chance that the market researchers will predict the program to be a hit.
a. Assuming that C = $160,000, find the strategy that maximizes the network’s expected profit.
b. What is the maximum value of C that the network should be willing to pay the market research firm?
c. Calculate and interpret EVPI for this decision problem.