Problem 13-19 (Algorithmic)

Hale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network's decision or transfer the rights for the pilot and series to a competitor for $300,000. Hale's decision alternatives and profits (in thousands of dollars) are as follows:

State of Nature

Decision Alternative Reject,S1 1 Year,S2 2 Years,S3

Produce pilot,d1 -250 300 350

Sell to competitor,d2 300 300 300

The probabilities for the states of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of $45,000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an unfavorable (U) review and that the following probabilities are relevant:

P(F) = 0.65 P(S1|F) = 0.05 P(S1|U) = 0.45

P(U) = 0.35 P(S2|F) = 0.21 P(S2|U) = 0.32

P(S3|F) = 0.74 P(S3|U) = 0.23

a. Choose the correct decision tree for this problem.

b. What is the recommended decision if the agency opinion is not used? What is the expected value? Enter your answer in thousands of dollars.

Recommended decision: _________ sell/produce

Expected Value = $_______thousands.

c. What is the expected value of perfect information? Enter your answer in thousands of dollars.

EVPI = $___________thousands.

d. What is Hale's optimal decision strategy assuming the agency's information is used?

If Favorable________ produce/sell

If Unfavorable ________ produce/sell

e. What is the expected value of the agency's information? Round your answer to two decimal places. Enter your answer in thousands of dollars.

EVSI = $__________thousands.

f. Is the agency's information worth the $45,000 fee? What is the maximum that Hale should be willing to pay for the information?

Decision________ yes/no

g. What is the recommended decision?

_______________________

option:

Use agency; produce the pilot if favorable, sell if unfavorable

No agency; sell the pilot

Use agency; sell the pilot if favorable, produce if unfavorable

No agency; produce the pilot