Question
Maximus Steel plans to introduce one of three new products code-named: Wren, Hawk, and Nightingale. The marketing department indicated that the success of any product
Maximus Steel plans to introduce one of three new products code-named: Wren, Hawk, and Nightingale. The marketing department indicated that the success of any product depends on the market conditions (Favorable, Neutral, or Unfavorable). The profit the company will earn also depends on the market conditions.
The table below shows the probability estimated for each market condition and the profits Maximus Steel will realize within those conditions:
Product Code | Market Conditions | ||
Favorable P = 0.2 | Neutral P = 0.7 | Unfavorable P = 0.1 | |
Wren | $120,000 | $70,000 | ($30,000) |
Hawk | $60,000 | $40,000 | $20,000 |
Nightingale | $35,000 | $30,000 | $30,000 |
Part 1 Instructions:
- Compute the expected value for each alternative. What is the best option for the company?
- Develop the opportunity loss table and compute the expected opportunity loss for each product.
- Determine how much the firm would be willing to pay to a market research firm to gain better information about future market conditions.
Part 2:
Maximus Steel is considering hiring a market research firm to do a survey to determine future market conditions. The results of the survey will indicate either positive or negative market conditions.
There is a 0.60 probability of a positive report, given favorable conditions; a 0.30 probability of a positive report, given neutral conditions; and a .10 probability of a positive report, given unfavorable conditions.
There is a .90 probability of a negative report, given unfavorable conditions; a .70 probability, given neutral conditions; and a .40 probability, given favorable conditions.
Develop a full decision tree for Maximus Stell. Determine the best strategy for the company, the expected value of the strategy, and the maximum amount the company should pay the market research firm for the survey results.
Note: This is all the info I have. Can you please just guide in the right direction for the decision tree. Thanks
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