A car manufacturer can launch either a new luxury sedan (L) or a new high-performance sports car (S).
- The car company expects that there is a p=0.7 chance that the luxury sedan will be a hit, and a (1-p)=0.3 chance that it will be a flop.
- The car company expects that there is a q=0.6 chance that the high-performance sports car will be a hit, and a (1-q) = 0.4 chance that it will be a flop.
- If the luxury sedan will be a hit, the company earns $3 Million; if it is a flop, it still earns $2 Million.
- If the high-performance sports car will be a hit, the company earns $6 Million; if it is a flop, it loses $2 Million.
The next 15 questions refer to the following scenario: A car manufacturer can launch either a new luxury sedan (L) or a new high-performance sports car (5). 0 The car company expects that there is a p=0.7 chance that the luxury sedan will be a hit, and a (1-p}=0.3 chance that it will be a flop. 0 The car company expects that there is a q=0.6 chance that the high-performance sports car will be a hit, and a (1-0) = 0.4 chance that it will be a flop. 0 If the luxury sedan will be a hit, the company earns $3 Million; if it is a flop, it still earns $2 Million. 0 If the high-performance sports car will be a hit, the company earns $6 Million; if it is a flop, it loses $2 Million. Question 1 (1 point) How big is the expected payoff from launching the luxury sedan? O 2,600,000 O 2,700,000 O 2,800,000 O 2,900,000 Question 2 (1 point) How big is the expected payoff from launching the high-performance sports car? O 2,600,000 O 2700.000 0 2,800,000 O 2,900,000 Question 3 (1 point) Measured by the expected payoffs, which statement is true? The car manufacturer O should launch the luxury sedan 0 should launch the high-performance sports car O is indifferent between launching the luxury sedan and the high-performance sports car. 0 should launch a high-performance luxury sedan without ant market study. Question 4 (1 point) Measured by the expected payoffs and holding constant q, for what range of p is launching the luxury sedan always the best choice? O p>0.6 Q p>0.7 O p>0.8 O p>o.9 Question 5 (1 point) Measured by the expected payoffs and holding constant p, for what range of q is launching the high-performance sports car always the best choice? O q>0.5875 O q>0.6125 O q>0.625 O q>0.65 Assume next that a risk averse manager needs to make the decision to launch either the luxury sedan or the high-performance sports car. The manager has a base salary of $100,000 plus an incentive package. The incentive package either increases or decreases the base salary, depending on the success of the new car. For every extra dollar earned with the new car, the manager's base salary increases by one cent. Likewise, for every dollar lost with the new car, the manager's base salary decreases by 1 cent. The manager's income utility function is U(lncome)=sqrt(lncome). Question 6 (1 point) If the manager decides to launch the luxury sedan and it is a hit, what will be the manager's total income? 0 $30,000 0 $120,000 0 $130,000 0 $160,000 Question 7 (1 point) If the manager decides to launch the luxury sedan and it is a flop, what will be the manager's total income? 0 $80,000 0 $120,000 0 $130,000 O $160,000 Question 8 (1 point) If the manager decides to launch the high-performance sports car and it is a hit, what will be the manager's total income? 0 $30,000 O $120,000 0 $130,000 O $160,000 Question 9 (1 point) If the manager decides to launch the high-performance sports care and it is a flop, what will be the manager's total income? O $30,000 0 $120,000 O $130,000 O $160,000 Question 10 (1 point) What is the manager's expected utility from launching the luxury sedan? C) 351.89 O 353.14 O 356.31 O 358.25
