8. Video Game Profitability. Video Tech is considering marketing one of two new video games for the coming holiday season: Battle Pacific or Space Pirates. Battle Pacific is a unique game and appears to have no competition. Estimated profits (in thousands of dollars) under high, medium, and low demand are as follows:

Demand Battle Pacific High Medium Low Profit $1,000 $700 $300 Probability 0.2 0.5 0.3

a. What is the decision to be made, what is the chance event, and what is the consequence?
Identify the alternatives for the decisions and the possible outcomes for the chance events.

b. Develop a decision tree.

c. Use the expected value approach to recommend which alternative Seneca Hill Winery should follow in order to maximize expected annual profit.

d. Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case. Suppose that the probability of strong demand for Chardonnay and weak demand for Riesling is 0.05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is 0.40. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50.

e. Other members of the management team expect the Chardonnay market to become saturated at some point in the future, causing a fall in prices. Suppose that the annual profit projections fall to $50,000 when demand for Chardonnay is strong and only Chardonnay grapes are planted. Using the original probability assessments, determine how this change would affect the optimal decision.