Problem 2: Television Network's Case
A television network earns $2.5 million dollars each season for a hit program and loses $0.5 million each season for a flop. Ingeneral, 19% of the programs are considered hits and 81% of the programs are flops. If the network does not make anyprogram, no profit will be earned.
(1) Construct the 1st decision tree that is the "No Any Information" tree to capture the above scenario.
(2) Based on (1), should the network continue making programs? Why or Why not. Please explain in detail.
(3) Construct the 2nd decision tree that has both "No Any Information" and "Perfect Information" decision alternatives.
(4) Based on (3), calculate EVPI.
(5) Based on (4), is it better for the network with the perfect information before they decide whether or not to make anyprogram? Why or Why not. Please explain in detail.
At a cost of $400,000, a research firm will analyze the pilot episode and issue a report predicting whether the program isgoing to be a hit or a flop. From the past data, if the program is going to be a hit, there is a 90% chance that the research firmpredicted it is going to be a hit. On the other hand, there is a 20% chance the research firm predicted that the program is goingto be a hit, but ended as a flop.
(6) Construct the 3rd decision tree that has both "No Any Information" and the "Research Firm" decision alternatives. Be
careful to calculate the appropriate probabilities and to include them in the decision tree.
(7) Based on (6), calculate the EVII.
(8) Based on (7), what should the network do? Should the network pay to consult the research firm? Why or Why not.Please explain in detail.
Note that your trees should include the following considerations if any.
- We use the negative sign (-) for the cost, the expenses, cash outflow, etc.
- We use the positive sign (+) for the revenue, profit, cash inflow, etc.
- The three trees that you build for Part 1, Part 3, and Part 6 respectively must be separated from one another