Abercrombie Inc. is currently selling a consumer good and faces two related decisions, one with respect to pricing and the other with respect to marketing. With respect to pricing, it can maintain its "standard" price or it can adopt a lower "discount" price. With respect to marketing, it can keep with its current advertising campaign or it can expand its advertising. The main risk facing the firm concerns the course of the economy in the near-term; whether the economy will continue healthy growth or whether it will experience a recession. The table below shows the firm's possible profit results (in $ millions) depending on its price and advertising actions. Finally, the firm judges that there is a 60% chance of growth and a 40% chance of a recession. Standard P+ Level ads Discount P+ Level ads Standard P+ Increased ads Discount P+ Increased ads Growing economy 25 15 30 20 Recession -20 0 -45 -10 (1) Determine the alternative maximizing its expected profit if Abercrombie must make its decision now (before knowing the future course of the economy). (2) Now suppose that Abercrombie can wait and decide its pricing decision after it knows the course of the economy. (It still must make its advertising decision immediately.) Draw a decision tree to find the firm's best course of action.
Abercrombie Inc. is currently selling a consumer good and faces two related decisions, one with respect to pricing and the other with respect to marketing. With respect to pricing, it can maintain its "standard" price or it can adopt a lower "discount" price. With respect to marketing, it can keep with its current advertising campaign or it can expand its advertising. The main risk facing the firm concerns the course of the economy in the near-term; whether the economy will continue healthy growth or whether it will experience a recession. The table below shows the firm's possible profit results (in $ millions) depending on its price and advertising actions. Finally, the firm judges that there is a 60% chance of growth and a 40% chance of a recession. Standard P+ Level ads Discount P+ Level ads Standard P+ Increased ads Discount P+ Increased ads Growing economy 25 15 30 20 Recession -20 0 -45 -10 (1) Determine the alternative maximizing its expected profit if Abercrombie must make its decision now (before knowing the future course of the economy). (2) Now suppose that Abercrombie can wait and decide its pricing decision after it knows the course of the economy. (It still must make its advertising decision immediately.) Draw a decision tree to find the firm's best course of action.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Abercrombie Inc. is currently selling a consumer good and faces two related
decisions, one with respect to pricing and the other with respect to marketing. With
respect to pricing, it can maintain its "standard" price or it can adopt a lower
"discount" price. With respect to marketing, it can keep with its current advertising
campaign or it can expand its advertising. The main risk facing the firm concerns the
course of the economy in the near-term; whether the economy will continue healthy
growth or whether it will experience a recession. The table below shows the firm's
possible profit results (in $ millions) depending on its price and advertising actions.
Finally, the firm judges that there is a 60% chance of growth and a 40% chance of a
recession.
Standard P + Level ads
Discount P + Level ads
Standard P+ Increased ads
Discount P + Increased ads
Growing economy
25
15
30
20
Recession
-20
0
-45
-10
(1) Determine the alternative maximizing its expected profit if Abercrombie must
make its decision now (before knowing the future course of the economy).
(2) Now suppose that Abercrombie can wait and decide its pricing decision after it
knows the course of the economy. (It still must make its advertising decision
immediately.) Draw a decision tree to find the firm's best course of action.
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