A manufacturer must decide whether to institute, at a cost of $75,000, a new advertising campaign. It is estimated that, if the campaign is very successful, profit will increase by $300,000 (excluding the cost of the advertising campaign). If the campaign is moderately successful, profit will increase by $120,000, while, if the campaign is unsuccessful, profit will remain unchanged. It is estimated that the probabilities for very successful, moderately successful, and unsuccessful advertising campaigns are 0.2, 0.5, and 0.3, respectively.
1. Set up the payoff table
2. If the expected monetary value criterion is used, should the advertising campaign be instituted?
3. Use the most likely event criterion to find the best action.
4. Use the expected regret criterion to choose the best action.
5. Draw the manufacturer’s decision tree.