would be for the “lax” program, making it the winner at an expected
cost of $.19 billion.- a. If the customer response is weak, MD’s expected profit is (.5)(20)
(.5)(100) $40 million. MD’s overall profit (averaging over
strong and weak customer responses) is (.4)(50) (.6)(40)
$4 million. The company should not have launched the
campaign.
b. If the customer response is weak, the company does better by
“pulling the plug”—a $20 million loss is better than an expected
$40 million loss from continuing. The overall expected profit from
launching the campaign (and terminating it in the face of a weak
customer response) is (.4)(50) (.6)(20) $8 million. Given
the flexibility to terminate, the company should launch the
campaign. - a. The appropriate decision tree is shown in the figure. The optimal
decision is to wait and buy the coat in the second week if it is still
available. The buyer’s expected profit is $30.
b. Under the price-reduction method, 40 coats are sold at $100, 40 coats
(half of the remaining 80) are sold at $75, 30 coats (three-fourths of
the remaining 40) are sold at $60, and 10 are sold at $50. The store’s
total revenue comes to $9,300.
c. With demand given by P 180 Q, the firm maximizes revenue by
selling 90 coats at a price of $90. (Check this by setting MR 0.) This
resulting revenue, $8,100, is less than the revenue of the price-
reduction scheme.
22 Answers to Odd-Numbered Problems- The expected utility of pursuing the biochemical approach alone is
.
The accompanying decision tree depicts the strategy of trying the
biogenetic approach first and then pursuing the biochemical approach if
necessary. The expected utility of this strategy is 57.5. Thus, pursuing the
biochemical approach alone has a slight edge over sequential
E(UChem).7U(80).3U(40)(.7)(64)(.3)(44) 5830 45 30 60 17.5$201/3$0Buy$451/2$0 $603/4$0Buy BuyWait 2/3 Wait 1/2 Wait 1/4
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