You are called on to decide how your company should advertise its newest product

Question

You are called on to decide how your company should advertise its newest product, a cell phone screen defroster for use in cold weather. Shown to the right is a decision tree for the profits (in $000's) you project for your sales of the defroster, depending on the weather this coming winter and your choice of advertising method.

a) Suppose P(Warm)equals=0.3

P(Moderate)equals=0.2

and P(Cold)equals=0.5

What is the expected value of each action?

EV(Point of Sale)=

EV(Magazine)=

EV(Internet)=

Action Sale Outcome Point of Sale Warm 530 Point of Sale Moderate 610 Point of Sale Cold 760 Magazine Warm 410 Magazine Moderate 540 Magazine Cold 840 Internet Warm 710 Internet Moderate 660 Internet Cold 480

Explanation / Answer

EV(Point of Sale)= P(Warm) * POS Sale(Warm) + P(Moderate) * POS Sale(Moderate) + P(Cold) * POS Sale(Cold)

= 0.3 * 530 + 0.2 * 610 + 0.5 * 760 = 661

EV(Magazine)= P(Warm) * Magazine Sale(Warm) + P(Moderate) * Magzine Sale(Moderate) + P(Cold) * Magzine Sale(Cold)

= 0.3 * 410 + 0.2 * 540 + 0.5 * 840 = 651

EV(Internet)= P(Warm) * Internet Sale(Warm) + P(Moderate) * Internet Sale(Moderate) + P(Cold) * Internet Sale(Cold)

= 0.3 * 710 + 0.2 * 660 + 0.5 * 480 = 585

Probability Weather Condition POS Internet Magzine 0.3 Warm 530 410 710 0.2 Moderate 610 540 660 0.5 Cold 760 840 480 661 651 585

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