Prediction of either good market for product

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Fiona is considering starting a company to produce designer dolls. She is uncertain about the market for these dolls, and, therefore, considers having a pilot study performed to see if the market for these dolls warrant producing them. If undertaken, the pilot study will cost her $10,000, and gives a final “prediction” of either “good market for product” or “bad market for product.” Ultiamtely, Fiona must decide on opening No plant (N), a Small plant (S), or a Large plant (L). If she builds a plant, her profit will depend on whether the market is “favorable” (F) or “unfavorable” (U). With a favorable market, Fiona’s profit will be $900,000 if she builds a large plant, and $600,000 if she builds the small plant. If the market is unfavorable, however, she will lose $300,000 if she builds the large plant, and $200,000 if she builds the small plant.

Fiona estimates that if the pilot study report says “good market,” the probability is .84 that the market will, indeed, be favorable; if the pilot study says “bad market,” the probability that market, indeed, will be unfavorable is .64. She also estimates that it is 50-50 as to what the pilot study says. Finally, she feels going in to the whole endeavor that the probability of favorable market is .6.

What is Fiona’s optimal strategy?

What is EVPI?

Reference no: EM131270416

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