Assignment:
Diet Coke is considering the introduction of a new brand of diet root beer. An internal study by the management estimates that the probability of success for their new diet root beer is 0.60. Of course they have the option of not producing the product. They have estimated the following payoff table for each choice.
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Choices
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Introduction of the new product will be a success (s 1 )
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Introduction of the new product will be a failure (s 2 )
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Produce the New Brand of Diet Root Beer
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$250,000
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-$300,000
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Do not Produce the New Brand of Diet Root Beer
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-$50,000
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-$20,000
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They have asked for the help of two consulting firms "Innovative Research Inc." and "Soft Drink Consultants" to help managers of Diet Coke to make an optimum decision. The "Soft Drink Consultants" provides two indicators, either I 1 (Soft Drink Consultants recommends introduction of the new product) or I 2 (Soft Drink Consultants doesn't recommend introduction of the new product), for which P( I 1 / S 1 ) = 0.70 and P( I 1 / S 2 ) = 0.40. The "Innovative Research Inc." provides two indicators, either J 1 (Innovative Research recommends introduction of the new product) or J 2 (Innovative Research doesn't recommend introduction of the new product), for which P( J 1 / S 1 ) = 0.60 and P( J 1 / S 2 ) = 0.30.
a. Calculate the EVSI and the efficiency for both consultants.
b. If both consultants charge $5,000, which firm should be hired and why?
c. If Soft Drink Consultants charges $10,000 and the "Innovative Research Inc." charges $4,000, which consulting firm should be used and why. Explain in details.