Reference no: EM133031891

Question - Management of a company is considering developing a new product. The prior probability of the success of the product in the market is 0.6 and that of the failure is 0.4. If it was successful, the expected profit would be $1,500,000. If unsuccessful, the expected loss would be $1,800,000. A marketing survey can be conducted at a cost of $350,000 to predict whether the product would be successful. Past experience with such surveys indicates that successful products have been predicted to be successful 80 percent of the time, whereas unsuccessful products have been predicted to be unsuccessful 70 percent of the time.

Required -

a) Develop a decision analysis formulation of this problem by identifying the decision alternatives, the states of nature, and the payoff table when the market survey is not conducted.

b) Assuming the market survey is not conducted, use Bayes' decision rule to determine which decision alternative should be chosen.

c) Find EVPI. Does this answer indicate that consideration should be given to conducting the market survey?