1.

A product manager for a soap manufacturer wishes to determine

whether or not to market a new toothpaste. The manager can order
a consumer testing program for $50,000. The present value of all
future profits for a successful toothpaste is $1,000,000; the brand's
failure would result in a net loss of $500,000. Not marketing the
toothpaste will not affect profits. The manager judges that the tooth-
paste would have a 50-50 chance of success without testing.
Customer testing will be either favorable (40% chance) or
unfavorable. Given a favorable test result, the chance of product
success is judged to be 80%. But for an unfavorable test result, the
probability of the toothpaste's success is judged to be only 30%.

Which course of action provides the greatest expected profit?

2. Fiber Synthetics’ manager must decide whether to process a chemical order or
to contract it out at a cost of $25,000. The final product batch will be sold for
$40,000. In-house processing involves direct costs for raw materials of
$4,000. The first step, costing $2,000, is chlorosulfanation, for which there is
an 80% chance of getting a satisfactory intermediate chemical base. If the
base is unsatisfactory, there will not be sufficient time to start a new batch, but
there will still be a choice of turning down the order or contracting out the
production. In the latter case, there is a 60% chance of being too late and
having to dump the final product. The last stage of in-house processing may
be a low-temperature one costing $10,000 or a high-temperature one costing
$14,000. There is a 30% chance that the low-temperature process will fail, so
that the resulting chemicals must be dumped; it would then be too late to go
outside. The high-temperature procedure is certain to work.

Using net cash flow (revenue minus costs) as the payoff measure, find the
strategy of the manager to maximizes expected payoff?
3. A government official wants to determine the most effective way to control tree damage from the
gypsy moth. There are three methods for attacking the pest: (1) spray with DDT; (2) use a scent to
lure and trap males, so that the remaining males must compete for mating with a much larger
number of males that have been sterilized in a laboratory and then released; and (3) spray with a
juvenile hormone that prevents the larvae from developing into adult moths.

The net improvement in current and future tree losses using DDT is lowest, because it assumed that
DDT will never completely eradicate the moth.

If the scent-lure program is instituted, the probability that it will leave a low number of native males is
0.5, with a 0.5 chance that it will leave a high number. Once the scent-lure results are known, a later
choice must be made either to spray with DDT or to release sterile males. The cost of the scent
lures is $5 million and the cost of sterilization is an additional $5 million. But if this two-phase
program is successful, the worth of present and future trees saved will be $30 million. If scent lures
leave a small native male population, there is a 90% chance for success using sterile males;
otherwise, there is only a 10% chance for success using sterile males. A failure results in no
savings.

The juvenile hormone must be synthesized at a cost of $3 million. There is only a .20 probability that
the resulting product will work. If it does, the worth of trees saved would be $50 million, because the
gypsy moth would become extinct. If the hormone does not work, savings would be zero.

Should one of the esoteric eradication procedures be chosen and then fail, the official’s contingency
plan is to spray with DDT. The savings from successful implementation of the sterile male or
juvenile hormone procedures reflect the value of environmental damage and other costs avoided by
not having to use DDT. To compare outcomes, the official proposes to use the net advantage (crop
and environmental savings minus cost) relative to where she would be forced to spray with DDT.

Using the proposed payoff measure, find the strategy that will maximize the decision maker’s
expected payoff.
4. Buzzy-B Toys must decide the course of action to follow in promoting a new whistling yo-yo. Initially,
management must decide whether to market the yo-yo or to conduct a test marketing program. After
test marketing the yo-yo, management must decide whether to abandon it or nationally distribute.

A national success will increase profits by $500,000, and a failure will reduce profits by $100,000.
Abandoning the product will not affect profits. The test marketing will cost Buzzy-B a further
$10,000.

If no test marketing is conducted, the probability for a national success is judged to be 0.45. The
assumed probability for a favorable test marketing result is 0.50. The conditional probability for
national success given favorable test marketing is 0.80; for national success given unfavorable test
results, it is 0.10.
a. What would be the course of action?
b. Calculate the expected payoff.
5. Whenever it has an opening, a company's personnel manager currently hires the first experienced
keypuncher who applies. Under this policy, only half the applicants prove to be satisfactory. The net
payoff to the company for a satisfactory new hire is $0, whereas it is -$1,000 for an unsatisfactory
one.

It has been proposed that a special test be administered before the hiring decision. The test will cost
$100 per applicant, but it is 90% reliable (i.e., 90% of those who pass it will prove to be satisfactory;
90% who fail it will turn out to be unsatisfactory). Only after the test results are in will the
decision be made whether or not to hire an applicant. The net payoffs for hiring an applicant are the
same as under the current policy, minus the cost of the test. But not hiring an applicant after testing
yields a net payoff of $300 (largely because other candidates must then be tested). It may be
assumed that half of all applicants would pass the test. Should the test be used?

6. The president of Hercules Helicopter Corporation must decide whether to propose to design and
perhaps later to build a new all-purpose junglecopter for the Army. If Hercules submits a proposal,
two results are possible: (1) it may win an R&D contract, or (2) it may lose to a competitor. If
Hercules wins the contract, the following choice will still have to be made: either (a) invest in
personnel and facilities with the hope of winning a follow-on production contract, or (b) not invest. In
either case (a) or (b), Hercules may win or lose the follow-on production contract, but additional
investment would increase its chances of winning. Diagram the Hercules decision problem.
Class:
A company may supply product in two ways; through own sales
center, or through retailers. Decision maker’s analysis shows 60%
favorable for retailers and 40% for own sales center. If sales through
retailer then there is a probability to reach all the customer is 70%;
and through sales center it is 50%.
What is the probability to reach all the customers?