A publisher intends to sign a contract for an accounting text with one of three authors. Smith, Brown, or Jones. If the text turns out to be very successful, profits (excluding any extraordinary advertising costs) will be $250,000; if the book is only moderately success- ful, these profits will be $80,000. In the event that the text fails, a loss of $80,000 will result. The probabilities given in the first table have been conjectured for these states of nature for the three books. Smith Brown Jones VERY SUCCESSFUL MODERATELY SUCCESSFUL FAILURE .6 The publisher also has the option of mounting, at a cost of $30,000, an extraordinary ad- vertising campaign for the book once it is published. It is estimated that if this were to be done, the probabilities for the three states of nature would be as shown in the following table: VERY SUCCESSFUL MODERATELY SUCCESSFUL FAILURE 4 Smith Brown Jones .4 3

(a) Draw the publisher's decision tree.

(b) According to the expected monetary value criterion, which author should be signed, and should the extraordinary advertising campaign be mounted?

(c) Following the calculations in part (b), the publisher has signed a contract with the chosen author. At this point, it is discovered that a clerical error has been made in the marketing department and that in fact the actual cost of the advertising campaign is $40,000. According to the EMV criterion, should the publisher offer to pay the chosen author to withdraw from the contract, and if so, what is the highest sum he should offer?