Value of perfect and sample information
A firm is considering the marketing of a new product which will either be a success or a failure. The prior probability of success is judged to be 0.3. If the product is marketed and is a success the firm expects to earn $500 000, while a failure is expected to lead to a loss of $300 000.
(a) Should the product be marketed? Why?
(b) What is the expected value of perfect information about the success or failure of the product
The firm is considering a market survey whose results can be classified as favourable, neutral or unfavourable. Some of the conditional probabilities are:
p(favourable|success) = 0.6 p(neutral|success) = 0.3 p(neutral|failure) = 0.2, p(unfavourable|failure) = 0.7.
(c) What is the posterior probability of success given a favourable survey result?
(d) What is the maximum the firm should be willing to pay for the market survey?