9781118041581

Answers to Odd-Numbered Problems 25

b. According to Bayes’ Theorem,

7. a. Opening directly on Broadway implies an expected profit of: (.3)(30) 
   (.5)(10) (.2)(50) $4 million. Though risky, the musical offers a
   positive return to investors.
   b. The gross profit on average employing out-of-town tryouts is: (.35)(24) 
   (.45)(12) (.2)(0) $13.8 million. Accounting for the cost of the
   previews, the producers’ net profit is $6.8 million. The preview route is
   not only more profitable on average. It also limits the downside loss to
   $7 million, whereas a Broadway bomb would mean a loss of $50 million.


8. a. The firm should not pursue the R&D program (expected profit 
   $4 million).

.06/.26.23



(.1)(.6)

(.1)(.6)(.5)(.4)

Pr(SuccessƒNo Endorsement)

Pr(NƒS)Pr(S)

Pr(NƒS)Pr(S)Pr(NƒF)Pr(F)

.54/.74.73.



(.9)(.6)

(.9)(.6)(.5)(.4)

Pr(SuccessƒEndorsement)

Pr(EƒS)Pr(S)

Pr(EƒS)Pr(S)Pr(EƒF)Pr(F)

Success

Pursue R&D

Failure

.5

.5

.6

.4

Exclusive

Shared

$50

–4 $5

32

$ 0

–$40

b. The firm should undertake R&D if it learns it has exclusive rights

(expected profit $5 million); otherwise it should not invest

(expected profit $17.5 million). Its overall expected profit is:

(.6)(5) $3 million.

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