"3-42 Jim Sellers is thinking about producing a new type of electric razor for men. If the market were favorable, he would get a return of $100,000, but if the market for this new type of razor were unfavorable, he would lose $60,000. Since Ron Bush is a good friend of Jim Sellers, Jim is considering the possibility of using Bush Marketing Research to gather additional information about the market for the razor. Ron has suggested that Jim either use a survey or a pilot study to test the market. The survey would be a sophisticated questionnaire administered to a test market. It will cost $5,000. Another alternative is to run a pilot study. This would involve producing a limited number of the new razors and trying to sell them in two cities that are typical of American cities. The pilot study is more accurate but is also more expensive. It will cost $20,000. Ron Bush has suggested that it would a good idea for Jim to conduct either the survey or the pilot before Jim makes the decision concerning whether to produce the new razor. But Jim is not sure if the value of the survey or the pilot is worth the cost.
Jim estimates that the probability of a successful market without performing a survey or pilot study is 0.5. Furthermore, the probability of a favorable survey result given a favorable market for razors is 0.7, and the probability of a favorable survey result given an unsuccessful market for razors is 0.2. In addition, the probability of an unfavorable pilot study given an unfavorable market is 0.9, and the probability of an unsuccessful pilot study result given a favorable market for razors is 0.2.
a. Draw the decision tree for this problem without the probability values.
b. Compute the revised probabilities needed to complete the decision, and place these values in the decision tree.
c. What is the best decision for Jim? Use EMV as the decision criterion
3-28 Even though independent gasoline stations have been having a difficult time, Susan Solomon has been thinking about starting her own independent gas station. Susan’s problem is to decide how large her station should be. The annual returns will depend on both the size of the station and a number of marketing factors related to oil industry and demand for gasoline. After careful analysis, Susan developed the following table:
Size of Gasoline Station Good Market ($) Fair Market ($) Poor Market ($)
Small $50,000 $20,000 -$10,000
Medium $80,000 $30,000 -$20,000
Large $100,000 $30,000 -$40,000
Very Large $300,000 $25,000 -$160,000
a. Develop a decision table for this decision.
b. What is the Maximax decision?
c. What is the Maximin decision?
d. What is the equally likely decision?
e. What is the criterion of realism decision? Use a = 0.8.
f. Develop an Opportunity Loss Table
g. What is the Minimax Regret Decision"
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