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a) The marketing department of a soft drink company wishes to determine the maximum expected payoff from introducing a new crystal-clear drink. What decision, in terms of choosing the best investment level, should the marketing department make using the payoff table below? Assume that the probability that the market share is less than 1% is 0.2, that the probability that market share is between 1 and 4% is 0.5, and that the probability that market share is at least 4% is 0.3. Assume that the marketing department is risk neutral.
Market Share
Investment Level
< 1%
1%-4%
³ 4%
Low
300,000
400,000
500,000
High
-400,000
3,000,000
b) What is the maximum amount of money the company should spend to get more information about the market share?
c) Here is a basic risky decision problem:
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