A consulting firm has offered their services to do market research to help better understand the market for the new toy. The firm has a 100% success rate in classifying successful toys and a 95% success rate in classifying unsuccessful toys. The firm charges $400,000 for their services. Determine whether or not the toy company should hire this consultant. Discuss your reasoning/approach in determining your answer.
Be sure to address all components of each short answer (i.e., if a brief discussion is requested, please provide
one).
1. A company is deciding whether or not to launch a new toy. The payoff table associated
with the launch and no launch decisions and the two possible outcomes, success or failure, of the toy
is provided below. The company has determined that the expected value of perfect information is
$375,000.
Outcome of Toy:
Decision Alternative Success | Failure
Launch the New Toy $2,000,000 | -$1,500,000
Don’t Launch the New Toy $0 | $0
Probabilities of States .75 | .25
A consulting firm has offered their services to do
for the new toy. The firm has a 100% success rate in classifying successful toys and a 95% success
rate in classifying unsuccessful toys. The firm charges $400,000 for their services. Determine whether
or not the toy company should hire this consultant. Discuss your reasoning/approach in determining
your answer.
As the organization has to make decisions for its long-term survival, there are different methods that help the managers make decisions under uncertain conditions. One of the methods is by calculating EVPI. It is the value that the company is ready to pay to access the perfect information in the market. It is calculated as the difference between the expected monetary value and expected value without perfect information.
EVPI = EVwPI- EMV
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