enter this market, you must invest $2,000,000 on initial advertising. After investing in the advertising, the amount of ...

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enter this market, you must invest $2,000,000 on initial

April 14, 2018

enter this market, you must invest $2,000,000 on initial advertising. After investing in the advertising, the amount of product you actually sell will depend on the level of demand for your product. If the “high” level of demand is realized, then the “operating profit” (revenues less operating cost) will be $2,800,000. If the “medium” or “low” demand levels are realized, your “profit” will be $2,000,000 and $1,000,000 respectively. These profit estimates do not account for the initial advertising expenditure. The probably of each of these three demand levels being realized is low (35%), medium (30%) and high (35%).


a. Outline the above-described situation as a decision-tree. Using the EMV criterion, solve the tree and lay out a recommendation for the company? Draw and solve decision tree below. Write recommendation below and on answer sheet.










b. Assume that you discover that your estimate of the profit from selling the new product if demand is “high” was too low. How much would the revenue for “high demand” have to rise in order for you to change your decision? Circle your final answer and put in blank on answer sheet. Show your work.



C. alternatively, assume that you are able to purchase dome marketing research that would tell you upfront what the level of demand would be. What is the most you would be willing to pay for this information? Show your work










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