Case 10.

1
a.

Decisions:
Choose price
Choose units
Sate:
Weak, Modarate, Severe

Price:
$
$
$

50.00
40.00
30.00

Research cost:
Payoff Table:
High price
Sales
Income
50000 $ 2,500,000.00
30000 $ 1,500,000.00
20000 $ 1,000,000.00

$
50.00
-Development
$ 1,700,000.00
$
700,000.00
$
200,000.00

Medium price
Sales
Income
50000 $ 2,000,000.00
30000 $ 1,200,000.00
20000 $
800,000.00

$
40.00
-Development
$ 1,200,000.00
$
400,000.00
$
-

Low price
Sales

$
30.00
Income
-Development
50000 $ 1,500,000.00 $
700,000.00
30000 $
900,000.00 $
100,000.00
20000 $
600,000.00 $
-200,000.00

b.
Maximum:
`

Equally:

High
Medium
$ 1,650,000.00 $ 1,150,000.00
$

816,666.67 $

483,333.33

Research Prob.
State of nature
Severe
Modarate
Weak

P(Sur.Sev.|nat)
Prior Prob
0.80
0.15
0.03

0.20
0.25
0.55

State of nature
Severe
Modarate
Weak

P(Sur.Mod.|nat)
Prior Prob
0.15
0.80
0.07

0.25
0.30
0.45

State of nature

P(Sur.Weak.|nat)

Prior Prob

Severe
Moadrate
Weak

c & d.

0.05
0.05
0.90

0.30
0.35
0.35

State of nature
Severe
Modarate
Weak

P(Sur.Sev.|nat)
Prior Prob
0.80
0.15
0.03

0.25
0.35
0.40

State of nature
Severe
Modarate
Weak

P(Sur.Mod.|nat)
Prior Prob
0.15
0.80
0.07

0.30
0.40
0.30

State of nature
Severe
Moadrate
Weak

P(Sur.Weak.|nat) Prior Prob

0.05
0.05
0.90

0.40
0.50
0.10

State of nature
Severe
Modarate
Weak

P(Sur.Sev.|nat)
Prior Prob
0.80
0.15
0.03

0.35
0.40
0.25

State of nature
Severe
Modarate
Weak

P(Sur.Mod.|nat)
Prior Prob
0.15
0.80
0.07

0.40
0.50
0.10

State of nature
Severe
Moadrate
Weak

P(Sur.Weak.|nat) Prior Prob

0.05
0.05
0.90

0.50
0.45
0.05

No Research:

Do Research:

High=
Medium=
Low=
EMV=

$
$
$
$

665,000.00
470,000.00
252,500.00
665,000.00

High= $
Medium= $
Low= $

790,087.08
460,069.66
130,052.25

Severe

EMV= $

790,087.08

Modarate
High=
Medium=
Low=
EMV=

$
$
$
$

830,738.12
492,590.50
154,442.87
830,738.12

High=
Medium=
Low=
EMV=

$
$
$
$

886,385.02
537,108.01
187,831.01
886,385.02

Weak

Case 10.1
Units:

Probabilities:
50000
30000
20000

High
0.2
0.7
0.1

10,000.00

Payoff
-Suport and Shipping
Net Profit
$
1,650,000.00 $ 1,650,000.00
$
650,000.00 $
650,000.00
$
150,000.00 $
150,000.00

Medium Low
0.20
0.25
0.25
0.35
0.55
0.40
0.25
0.30
0.30
0.40
0.45
0.30
0.30
0.40
0.35
0.50
0.35
0.10

0.35
0.40
0.25
0.40
0.50
0.10
0.50
0.45
0.05

Decision nodes
-Suport and Shipping
Net Profit
$
1,150,000.00 $ 1,150,000.00
$
350,000.00 $
350,000.00
$
-50,000.00 $
-50,000.00

-Suport and Shipping

Net Profit
$
650,000.00 $
650,000.00
$
50,000.00 $
50,000.00
$
-250,000.00 $
-250,000.00
Low
$
$

Max
650,000.00 $ 1,650,000.00
150,000.00 $

Joint Prob

816,666.67

New Prob
0.16
0.04
0.02
0.21

Joint Prob

0.75
0.18
0.08
1.00
New Prob

0.04
0.24
0.03
0.31
Joint Prob

0.12
0.78
0.10
1.00
New Prob

No Research

0.02
0.02
0.32
0.35
Joint Prob

0.04
0.05
0.91
1.00
New Prob

0.20
0.05
0.01
0.26
Joint Prob

0.76
0.20
0.05
1.00
New Prob

0.05
0.32
0.02
0.39
Joint Prob

0.12
0.83
0.05
1.00
New Prob

0.02
0.03
0.09
0.14
Joint Prob

0.15 Do Research
0.19
0.67
1.00

Severe

New Prob
0.28
0.06
0.01
0.35

Joint Prob

0.81
0.17
0.02
1.00
New Prob

0.06
0.40
0.01
0.47
Joint Prob

0.13
0.86
0.01
1.00
New Prob

0.03
0.02
0.05
0.09

0.27
0.24
0.49
1.00
Modarate

Weak

State of nature nodes

Severe

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

0.2
Modarate
0.7
Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

0.2
Modarate
0.7
Weak

Low
$ 30.00

0.1

Severe
0.2
Modarate
0.7
Weak
0.1

Severe
0.2
Modarate
0.7

Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units

50000

0.2
Modarate
0.7
Weak

Low
$ 30.00

0.1

Severe
0.2
Modarate
0.7
Weak
0.1

Severe
0.2
Modarate
0.7
Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

0.2
Modarate

0.7
Weak
Low
$ 30.00

0.1

Severe

Units
Units

30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

0.2
Modarate
0.7
Weak
0.1

Severe
0.2
Modarate
0.7
Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

0.2
Modarate
0.7
Weak

Low
$ 30.00

0.1

Severe

0.2
Modarate
0.7
Weak
0.1

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

0.20 $
0.25 $
0.55 $

1,650,000.00 EMV=
650,000.00
150,000.00

575,000.00

0.25 $
0.30 $
0.45 $

1,650,000.00 EMV=
650,000.00
150,000.00

675,000.00

0.30 $
0.35 $
0.35 $

1,650,000.00 EMV=
650,000.00
150,000.00

775,000.00

0.25 $
0.35 $
0.40 $

1,150,000.00 EMV=
350,000.00
-50,000.00

390,000.00

0.30 $
0.40 $
0.30 $

1,150,000.00 EMV=
350,000.00
-50,000.00

470,000.00

0.40 $
0.50 $
0.10 $

1,150,000.00 EMV=
350,000.00
-50,000.00

630,000.00

0.35 $
0.40 $
0.25 $

650,000.00 EMV=
50,000.00
-250,000.00

185,000.00

0.40 $
0.50 $
0.10 $

650,000.00 EMV=
50,000.00
-250,000.00

260,000.00

0.50 $
0.45 $
0.05 $

650,000.00 EMV=
50,000.00
-250,000.00

335,000.00

0.75 $
0.18 $
0.08 $

1,640,000.00 EMV=
640,000.00
140,000.00

$ 1,349,112.15

0.12 $
0.78 $
0.10 $

1,640,000.00 EMV=
640,000.00
140,000.00

710,388.35

0.04 $
0.05 $
0.91 $

1,640,000.00 EMV=
640,000.00
140,000.00

229,928.06

0.75 $
0.18 $
0.08 $

1,140,000.00 EMV=
340,000.00
-60,000.00

907,289.72

0.12 $
0.78 $
0.10 $

1,140,000.00 EMV=
340,000.00
-60,000.00

396,310.68

0.04 $
0.05 $
0.91 $

1,140,000.00 EMV=
340,000.00
-60,000.00

11,942.45

0.75 $
0.18 $
0.08 $

640,000.00 EMV=
40,000.00
-260,000.00

465,467.29

0.12 $
0.78 $
0.10 $

640,000.00 EMV=
40,000.00
-260,000.00

82,233.01

0.04 $
0.05 $
0.91 $

640,000.00 EMV=
40,000.00
-260,000.00

-206,043.17

0.76 $
0.20 $
0.05 $

1,640,000.00 EMV=
640,000.00
140,000.00

$ 1,373,459.36

0.12 $
0.83 $
0.05 $

1,640,000.00 EMV=
640,000.00
140,000.00

729,378.24

0.15 $
0.19 $
0.67 $

1,640,000.00 EMV=
640,000.00
140,000.00

454,814.81

0.76 $
0.20 $
0.05 $

1,140,000.00 EMV=
340,000.00
-60,000.00

926,767.49

0.12 $

1,140,000.00 EMV=

411,502.59

0.83 $
0.05 $

340,000.00
-60,000.00

0.15 $
0.19 $
0.67 $

1,140,000.00 EMV=
340,000.00
-60,000.00

191,851.85

0.76 $
0.20 $
0.05 $

640,000.00 EMV=
40,000.00
-260,000.00

480,075.61

0.12 $
0.83 $
0.05 $

640,000.00 EMV=
40,000.00
-260,000.00

93,626.94

0.15 $
0.19 $
0.67 $

640,000.00 EMV=
40,000.00
-260,000.00

-71,111.11

0.81 $
0.17 $
0.02 $

1,640,000.00 EMV=
640,000.00
140,000.00

$ 1,434,964.03

0.13 $
0.86 $
0.01 $

1,640,000.00 EMV=
640,000.00
140,000.00

760,985.01

0.27 $
0.24 $
0.49 $

1,640,000.00 EMV=
640,000.00
140,000.00

667,027.03

0.81 $
0.17 $
0.02 $

1,140,000.00 EMV=
340,000.00
-60,000.00

975,971.22

0.13 $
0.86 $
0.01 $

1,140,000.00 EMV=
340,000.00
-60,000.00

436,788.01

0.27 $
0.24 $
0.49 $

1,140,000.00 EMV=
340,000.00
-60,000.00

361,621.62

0.81 $
0.17 $
0.02 $

640,000.00 EMV=
40,000.00
-260,000.00

516,978.42

0.13 $
0.86 $
0.01 $

640,000.00 EMV=
40,000.00
-260,000.00

112,591.01

0.27 $
0.24 $
0.49 $

640,000.00 EMV=
40,000.00
-260,000.00

56,216.22