The MBA Movie Studio is trying to decide how to distribute its new movie The movie has the potential of being a great financial success (a smash), but the executives are not sure because the subject is controversial. And they have seen some films heralded as smashes become flops with disastrous financial consequences.

The decision facing MBA is whether or not to put out the movie Claws on a limited first-run basis. This means that the movie will show only on a few select theaters during the first six months. After six months, it will be released generally. If the movie turns out to be a success, this is clearly the best approach because the studio makes considerable profit from these select theaters.

The other alternative is to release the film for wide distribution immediately.

The profit for the two alternatives are given in the accompanying table, and classified in terms of whether the film is a Smash, Medium success, or Flop.

Profits from Film Claws

Actions

Level of Success

Probability

Limited Initial Release

Widespread Release

Smash

0.3

$22 million

$12 million

Medium

0.4

8 million

8 million

Flop

0.3

10 million

2 million

There is a considerable discussion in MBA about the potential of Claws. Management has finally agreed on the probabilities shown in the table, but which decision to make is still unclear. One possibility is to have a few sneak previews of the movie and get the audiences opinions. The cost of such a process would be about $50,000, and several executives in the company think it would be money wasted, since sneak preview audiences tend to rate the movie as good or outstanding even when it turns out to be a flop. To support this, the following table was produced, describing the companys past experience with 40 sneak preview audience reactions.

Sneak Preview Audience Reaction

Audience Rating

Movies Actual Success

Smash

Medium

Flop

Totals

Outstanding

9

12

3

24

Good

1

6

5

12

Poor

0

2

2

4

Totals

10

20

10

40

1. Draw the decision tree for this problem.

2.Calculate the posterior probabilities for Smash, Medium, and Flop, given the various audience reactions.

3. Assume that MBA is willing to base its decision on expected value. What decision should the MBA Movie Studio make about the movie Claws? Show your calculations.