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What is the managers prior probability
Course:- Managerial Accounting
Reference No.:- EM13180019

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Bayesian revision of probabilities

The manager of ABC Co. is concerned that a competing firm might be planning to introduce a new product that could seriously affect his sales.  He feels that the chances are only one in five that the competitor is actually planning to introduce a new product.

He then discovers that the competitor is building a new plant.  After careful consideration he decides that if a new product is to be introduced the odds would be 3 to 2 in favour of the building of a new plant, but if a new product is not to be introduced, the odds would be 4 to 1 against the building of a new plant.

(a)  What is the manager's prior probability that his competitor is planning to introduce a new product?

(b)  What is his revised probability of a new product given that the competitor is building a new plant?

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