Problem 1 (Decision Tree based) – 5 POINTS
The head of operations for a movie studio wants to
determine which of two new scripts they should select for
their next major production (Due to budgeting constraints,
only one new picture can be undertaken at this time). She
feels that script #1 has a 70 percent chance of earning
about $10,000,000 over the long run, but a 30 percent
chance of losing $2,000,000. If this movie is successful
(positive earnings), then a sequel will also be produced,
with an 80 percent chance of earning $5,000,000, but a 20
percent chance of losing $1,000,000. On the other hand,
she feels that script #2 has a 60 percent chance of earning
$12,000,000 but a 40 percent chance of losing
$3,000,000. If successful, its sequel would have a 50
percent chance of earning $8,000,000, but a 50 percent
chance of losing $4,000,000. Of course, in either case, if
the original movie were a "flop" i.e., is losing money,
then no sequel would be produced. Use "S" for successful
and "F" for flop or failure.
Draw a decision tree to analyze this problem and
answer the following questions.
(a). What is the expected value of selecting script #1?
(b). What is the expected value of selecting script #2?