Question
What is the correct way to construct a decision tree for the following scenario? No calculations are needed, however please show which scenarios and corresponding
What is the correct way to construct a decision tree for the following scenario? No calculations are needed, however please show which scenarios and corresponding costs and probabilities go on which nodes and branches.
Scenario:
PLE faces two possible decisions: introduce the product globally at a cost of $850,000 or evaluate it in a North American test market at a cost of $200,000. If PLE introduces the product globally, PLE might find either a high or low response to the product. The probabilities of these events are estimated to be 0.6 and 0.4, respectively. With a high response, gross revenues of $2,000,000 are expected; with a low response, the figure is $450,000. If PLE starts with a North American test market, it might find a low response or a high response, with probabilities of 0.3 and 0.7, respectively. This may or may not reflect the global market potential. In any case, after conducting the marketing research, PLE next needs to decide whether to keep sales only in North America, market globally, or drop the product.
If the North American response is high and PLE stays only in North America, the expected revenue is $1,200,000. If it markets globally (at an additional cost of $200,00), the probability of a high global response is 0.90 (low global response probability is 0.10) with revenues of $2,000,00 ($450,000 if the global response is low).
If the North American response is low, and it remains in North America, the expected revenue is $200,000. If PLE markets globally (at an additional cost of $600,000), the probability of a high global response is 0.05 (low global response probability is 0.95), with revenues of $2,000,000 ($450,000 if the global response is low).
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