A television network earns an average of $65 million each season from a hit program and loses an average of $25 million each season on a program that turns out to be a flop. Of all programs picked up by this network in recent years, 30% turn out to be hits; the rest 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 65% 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 40% chance that the market researchers will predict the program to be a hit.

1. What is the EMV maximizing decision(s) for the television network?
2. What is the maximum that one should pay for the market research? How do you assess the quality of market research in this example?

A B C D E F 1 New Show a Hit? (W&A Problem 9.51) 2 3 Hit Show $65 4 Flop -$25 5 6 Probability of Hit 0.3 Probability of Flop 0.7 8 9 Cost of Market Research $2 10 11 This is how often the Market Research was Accurate 12 When a show was a Hit Hit 13 Hit 0.65 14 Flop 0.40 15 16 17