Srava’s company is considering to market a new product. The new product is estim

Question

Srava’s company is considering to market a new product. The new product is estimeted to be twice as likely that the product would prove to be successful as unsuccessful. If it were successful, the profit is expected to be $50 , otherwise it will be loss and the expected loss is $20.

a. Formulate a decision analysis formulation by identifying the alternative, state of nature, and the payoff table.

b. Determine which alternative should be chosen. c. Now, assume that the marketing team conducts a market survey. The survey cost is $10

c. The survey purpose is to predict whether the product would be successful. Past experience with such survey indicates that successful products have been predicted to be successful 80 percent of time, whereas unsuccessful products have been predicted to be unsuccessful 70 percent of the time. Find the posterior probabilities of this additional information, and then find the alternative should be chosen if the market survey is conducted

Explanation / Answer

ANSWER (a) AND (b)

Alternative

(1) Market the product

(2) Not do anything

State of Nature

(a) Product is succesful

(b) Product is not succesful

Payoff Table

Expected Value

50 (0.66) + (-20)(0.33) = 33 - 6.6 = 26.4

ANSWER (c)

To calculate the posterior possibilities...

Prior Probabilities

P (Success) = 0.66 P (Unsuccecsful) = 0.33

P (Succesful | Product is succesful) = 0.8 P (Unsuccesful | Product is unsuccesful) = 0.70

Succesful

Unsuccessful

Hence posterior probabilities are 0.36 and 0.63

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