PROBLEM:Consider the IONB furniture decision tree. It is impossible to evaluate immediately act without firstconsidering all later decision that result from this choice. Evaluation must be made in reverse of theirnatural sequence. Look for the value of the following to determine the correct decision.Determine the Payoff of : in SHow much is the Test Market Favorable valueHow much is the Test Market Unfavorable valueHow much is Do not Test Market valueWhat is the Final DecisionaTest Market FavorablebTest Market Un favorableDo not Test MarketHow much is the final Payoff1234 0.85SuccessNet Payoff$42,000.00SET DAdvertise0.55Favorable0.15Failure-$50,000.00Do Not Advertise$6,000.000.15Success$0,000.00Test MarketAdvertise0.450.85Failure-570,000.00UnfavorableDECISIONDo Not Advertise-$23,000.000.5Success$48,000.00AdvertiseDo not Test Market0.5Failure-$60,000.00Do Not Advertise$0.00

*Answer: . EV(Test market - Favorable - Advertise) = 42000*(0.85) + (-50000)*(0.15) = 28,200…

Answered: Advertise 0.55 Favorable 015 Failure…

Advertise 0.55 Favorable 015 Failure -$50 Do Not Advertise 0.15 Success $50 Test Market Advertise 0.45 0.85 Unfavorable Failure -$70 Do Not Advertise -$23 0.5

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

PROBLEM:
Consider the IONB furniture decision tree. It is impossible to evaluate immediately act without first
considering all later decision that result from this choice. Evaluation must be made in reverse of their
natural sequence. Look for the value of the following to determine the correct decision.
Determine the Payoff of : in S
How much is the Test Market Favorable value
How much is the Test Market Unfavorable value
How much is Do not Test Market value
What is the Final Decision
a
Test Market Favorable
b
Test Market Un favorable
Do not Test Market
How much is the final Payoff
1234

0.85
Success
Net Payoff
$42,000.00
SET D
Advertise
0.55
Favorable
0.15
Failure
-$50,000.00
Do Not Advertise
$6,000.00
0.15
Success
$0,000.00
Test Market
Advertise
0.45
0.85
Failure
-570,000.00
Unfavorable
DECISION
Do Not Advertise
-$23,000.00
0.5
Success
$48,000.00
Advertise
Do not Test Market
0.5
Failure
-$60,000.00
Do Not Advertise
$0.00

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