firm has to decide the kind of R&D projects that it wants to develop. The firm has two alternative strategies: i) continue investing in projects for reducing the costs of current products or ii) invest in projects for developing new products. Conditional to the results of those R&D projects the firm will launch (or not) new products. Obviously both are risky decisions. First, the R&D activities can be a success or not. Second, we don't know which is going to be the future demand for new products (high vs. low demand).

a) Which decisions has to make the firm (endogenous variables)? Which are the alternatives or strategies for each decision? You have to qualify one decision as strategical and the other as tactical one. Which is the criteria?

b) Which are the nature states (exogenous variables) in this case? Which are the possible realizations of each nature state?

c) Represent the problem by a decision tree.

New products can be launched only in the case that R&D projects for their development has succeed. The firm always can follow selling the same products. Then, the results are going to be the following ones.

The firm invest in R&D projects for reducing the costs of current products and:

-It succeeds and the new products have high demand. Then the profits are going to increase in 2.000.000 .

-It succeeds and the new products have low demand. Then the profits are going to increase in 4.000.000 .

-It fails and the new products have high demand. Then the profits are going to decrease in 2.000.000 .

-It fails and the new products have low demand. Then the profits are going to maintain.

The firm invest in R&D projects for developing new products.

The project fails:

When the new products have high demand the profits are going to decrease in 2.000.000 .When the new products have low demand the profits are going to maintain.

The R&D project for reducing the calories of producing sweet taste succeeds:

The firm launches new products:

When the new products have high demand, the increase in the profits of the firm is going to be 3.800.000, otherwise the profits are going to be reduced in 2.200.000.

The firm follows with the same products:

When the new products have high demand the profits are going to decrease in 2.000.000 . When the new products have low demand the profits are going to maintain.

The probability of success (60%) is independent of the R&D project developed. The probability that new products are going to have high demand is 80%.