Practice Problem Chapter 5 (Decision Trees)

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Presentation transcript:

Practice Problem Chapter 5 (Decision Trees) 5-22 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 it. 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. Construct the decision tree diagram and perform backward induction analysis to determine the optimal course of action if a net change in profits is the expected payoff.

Practice Problem Chapter 5 (Decision Trees)

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Decision tree ready for folding back (backwards Induction).

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information

Practice Problem Chapter 5 (Decision Trees) Red means new information Optimal Strategy: Test market and if (1)favorable, then market; (2) unfavorable, then abandon. The expected payoff is $180,000.