Question 3: Management of the Telemore Company is considering developing and marketing a new product.
It is estimated to be twice as likely that the product would prove to be successful as unsuccessful. If it were
successful, the expected profit would be 2000. If unsuccessful, the expected loss would be 1800. A marketing
survey can be conducted at a cost of 400 to predict whether the product would be successful. Past experience
with such surveys indicates that successful products have been predicted to be successful 70 percent of the time,
whereas unsuccessful products have been predicted to be unsuccessful 80 percent of the time.
Part 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.
Part b) Assuming the market survey is not conducted, use Bayes' decision rule to determine which
decision alternative should be chosen.
Part c) Find EVPI. Does this answer indicate that consideration should be given to conducting the market
survey?
Part d) Assume now that the market survey is conducted. Find the posterior probabilities of the
respective states of nature for each of the two possible predictions from the market survey.
Part e) Find the optimal policy regarding whether to conduct the market survey and whether to develop
and market the new product.