Management of the Telemore Company is considering developing and marketing a new product. It is estimated to be twice as likely that the product would prove to be successful as unsuccessful.
It it were successful, the expected profit would be $1, 500,000. If unsuccessful, the expected loss would be $1, 800,000. A marketing survey can be conducted at a cost of $300,000 to predict whether the product would be successful.
Past experience with such surveys indicates that successful products have been predicted to be successful 80 percent of the time, whereas unsuccessful products have been predicted to be unsuccessful 70 percent of the time.
1. Find the optimal policy regarding whether to conduct the market survey and whether to develop and market the new product.
2. What is the maximum cost of survey that makes it worth conducting?
3. What is the survey methods could be improved so that it provides more accurate estimates of market success, what is the maximum cost of such an improved survey?