Video Tech is considering marketing one of two new video games for the coming holiday season: Battle Pacific or Space Pirates. Battle Pacific is a unique game and appears to have no competition. Estimated profits (in thousands of dollars) under high, medium, and low demand are as follows:
|
Battle Pacific
|
High
|
DemandMedium
|
Low
|
|
Profit
|
$1000
|
$700
|
$300
|
|
Probability
|
0.2
|
0.5
|
0.3
|
Video Tech is optimistic about its Space Pirates game. However, the concern is that prof- itability will be affected by a competitor's introduction of a video game viewed as similar to Space Pirates. Estimated profits (in thousands of dollars) with and without competition are as follows:
|
Space Pirates with Competition
|
High
|
Demand Medium
|
Low
|
|
Profit
|
$800
|
$400
|
$200
|
|
Probability
|
0.3
|
0.4
|
0.3
|
|
Space Pirates
|
|
Demand
|
|
|
without Competition
|
High
|
Medium
|
Low
|
|
Profit
|
$1600
|
$800
|
$400
|
|
Probability
|
0.5
|
0.3
|
0.2
|
a. Develop a decision tree for the Video Tech problem.
b. For planning purposes, Video Tech believes there is a 0.6 probability that its competitor will produce a new game similar to Space Pirates. Given this probability of competition, the director of planning recommends marketing the Battle Pacific video game. Using expected value, what is your recommended decision?
c. Show a risk profile for your recommended decision.
d. Use sensitivity analysis to determine what the probability of competition for Space Pirates would have to be for you to change your recommended decision alternative.