Product expected value approach-expected utility
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A new product has the following profit projections and associated probabilities:
Profit Probability
$150,000 0.10
$100,000 0.25
$ 50,000 0.20
$0 0.15
-$ 50,000 0.20
-$100,000 0.10
a. Use the expected value approach to decide whether to market the new product.
b. Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery?
c. Assume that the following indifference probabilities are assigned. Do the utilities reflect the behaviour of a risk taker or a risk avoider?
Profit Indifference Probability (p)
$100,000 0.95
$ 50,000 0.70
$0 0.50
-$ 50,000 0.25
d. Use expected utility to make a recommended decision.
e. Should the decision maker feel comfortable with the final decision recommended by the analysis?
.
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The product expected value approach-expected utility is determined.
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A new product has the following profit projections and associated probabilities:
Profit Probability
$150,000 0.10
$100,000 0.25
$ 50,000 0.20
$0 0.15
-$ 50,000 0.20
-$100,000 0.10
a. Use the expected value approach to decide whether to market the new product.
EV for Project = 0.10*150000 +0.25*100000+0.20*50000+0.15*0+0.20*-50000+0.10*-100000
= $30,000
Since the expected value is positive, using expected value criteria, we should launch the new product.
b. Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery?
Suppose, we arbitrary assign ...
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