Question
You are managing the introduction of a new product and would like to conduct a test-run at a regional level before embarking on a nationwide
You are managing the introduction of a new product and would like to conduct a test-run at a regional level before embarking on a nationwide launch of the product. There are three regions of the country where such a test-run could be conducted: Alberta; Atlantic Canada; and Ontario. However, uncertainty exists regarding the actual payoffs from the test-runs. More specifically, for each region, three revenue numbers and their respective probabilities have been made available by the consultants as depicted in the payoff table below.
Decision | Payoffs ($) | ||
High | Medium | Low | |
Alberta | 60,000 | 50,000 | -5,000 |
Atlantic Canada | 56,901 | 51,075 | -7,000 |
Ontario | 75,000 | 51,000 | -20,000 |
Probability | 0.3 | 0.4 | 0.3 |
- Which region will you choose if your objective is to maximize expected payoff?
- What is the expected value of perfect information for this question?
- What is your decision if you are a risk averse individual? Use an exponential utility function such as Ux=1-e-x/R, where x is the payoff, and R=250,000.
- How would you explain the change from part a)?
- What is the dollar equivalent of the risk-averse decision?
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