Embassy Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a0.65 probability that the textbook will be successful. If successful, a profit of $750,000 willbe realized. If the company decides to publish the textbook and it is unsuccessful, a loss of$250,000 will occur.Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F)or unfavorable (U) evaluation of the manuscript. Past experience with the review processsuggests that probabilities P(F) 0.7 and P(U) 0.3 apply. Let s1 the textbook issuccessful, and s2 the textbook is unsuccessful. The editor’s initial probabilities of s1 ands2 will be revised based on whether the review is favorable or unfavorable. The revisedprobabilities are as follows:P(s1 F) 0.75 P(s1 U) 0.417P(s2 F) 0.25 P(s2 U) 0.583a. Construct a decision tree assuming that the company will first make the decision ofwhether to send the manuscript out for review and then make the decision to accept orreject the manuscript.b. Analyze the decision tree to determine the optimal decision strategy for the publishing company.c. If the manuscript review costs $5000, what is your recommendation?d. What is the expected value of perfect information? What does this EVPI suggest forthe company?
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
Embassy Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a
0.65
be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of
$250,000 will occur.
Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F)
or unfavorable (U) evaluation of the manuscript. Past experience with the review process
suggests that probabilities P(F) 0.7 and P(U) 0.3 apply. Let s1 the textbook is
successful, and s2 the textbook is unsuccessful. The editor’s initial probabilities of s1 and
s
2 will be revised based on whether the review is favorable or unfavorable. The revised
probabilities are as follows:
P(s1 F) 0.75 P(s1 U) 0.417
P(s2 F) 0.25 P(s2 U) 0.583
a. Construct a decision tree assuming that the company will first make the decision of
whether to send the manuscript out for review and then make the decision to accept or
reject the manuscript.
b. Analyze the decision tree to determine the optimal decision strategy for the publishing company.
c. If the manuscript review costs $5000, what is your recommendation?
d. What is the
the company?
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