Question
A household appliance company is trying to decide whether to introduce a new washing machine model or not based on the profit it will make.
A household appliance company is trying to decide whether to introduce a new washing machine model or not based on the profit it will make. However, there is an uncertainty for the revenue that the company would make if they introduce the product. The revenue depends on market demand, which they believe will be high with probability 0.4, medium with probability 0.3, and low with probability 0.3. The revenue will be $700 000 for high demand, $400 000 for medium demand, and $100 000 for low demand. The cost of introducing the new washing machine model into the market is $200 000. Based on this information: a) Construct the appropriate decision tree. Which strategy should the company follow? b) Apply sensitivity analysis on market demand probabilities. c) Considering the market demand uncertainties find the EVPI. d) Assume that the company can consult a market analyst who can provide information on market demand uncertainty in advance. However, the analysts information is not perfect: The following table summarizes the uncertainties associated with the analysts information: P(Analyst says demand=high|true demand=high) 0.8 P(Analyst says demand=high|true demand=medium) 0.3 P(Analyst says demand=high|true demand=low) 0.1 P(Analyst says demand=medium|true demand=high) 0.1 P(Analyst says demand=medium|true demand=medium) 0.6 P(Analyst says demand=medium|true demand=low) 0.2 Based on these probabilities, find the EVII.
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