AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product.  The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows:  Competitor reaction  Product A  Product B  No action  £500,000  £600,000  Launch a similar product  £300,000  £400,000  Launch a better product  (£100,000)  (£200,000)    Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company’s profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by £150,000.  Required:  a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company.

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Your Question:

AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product. 

The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows: 

Competitor reaction 

Product A 

Product B 

No action 

£500,000 

£600,000 

Launch a similar product 

£300,000 

£400,000 

Launch a better product 

(£100,000) 

(£200,000) 

 

Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company’s profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by £150,000. 

Required: 

  1. a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company.
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