9781118041581

c. According to the joint table, Pr(S|C) .5/.8 .625 and Pr(S|H) 

0/.2 0.

Risky Outcomes

Prototype Success Failure Total

Cool .5 .3 .8

Hot 0.2. 2

.5 .5

d. If the prototype chip runs cool, the expected profit from pursuing the

R&D investment is (.625)(32) (.375)(40) $5 million, so it is

worth investing. If the chip runs hot, the R&D program will fail with

certainty, so the firm should walk away. Therefore, the firm’s overall

expected profit from testing the chip is: (.8)(5) (.2)(0) $4

million. Testing makes sense because its expected value ($4 million) is

greater than its cost ($2 million).

11. a. A bid of $130,000 is the best choice. Its expected profit is (.5)(30,000) 
    $15,000.
    b. Here, the expected cost is $100,000, which is identical to the certain
    cost in part (a). Thus, there is no change in expected profit. The
    optimal bid is $130,000 as before.
    c. As the decision tree shows, your company’s expected profit with perfect
    cost information is $17,500. Thus, the EVI 17,500 15,000 $2,500.

26 Answers to Odd-Numbered Problems

.5

.5

Success

Failure

$50

–$40

5

.5

.5

Success

Failure

$5

–$40

.6

Exclusive

3

0

Not

0

Not

5

.4

Share

Pursue R&D

Pursue R&D

0 –17.5

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