Exercises on the Value of Information

3. You are brand manager of Krusty cereal. Even though the brand is contributing $1,000,000 of annual profits, your boss still thinks that you can do even better with a new and improved cereal. She estimates that annual profits for such a cereal are equally likely to be $500,000, $900,000, or $1,800,000.

a) Should you introduce the new and improved Krusty cereal?

b) Suppose that a test market would inform you perfectly about the future profitability of the improved cereal. What is the most you would pay for such a test market?