Hale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and
Hale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network's decision or transfer the rights for the pilot and series to a competitor for $100,000. Hale's decision alternatives and profits (in thousands of dollars) are as follows:
| State of Nature | |||
| Decision Alternative | Reject, S1 | 1 Year, S2 | 2 Years, S3 |
| Produce pilot, d1 | -100 | 50 | 150 |
| Sell to competitor, d2 | 100 | 100 | 100 |
The probabilities for the states of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of $5,000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an unfavorable (U) review and that the following probabilities are relevant:
| P(F) = 0.69 | P(S1|F) = 0.09 | P(S1|U) = 0.45 |
| P(U) = 0.31 | P(S2|F) = 0.26 | P(S2|U) = 0.39 |
| P(S3|F) = 0.65 | P(S3|U) = 0.16 |
d. What is Hale's optimal decision strategy assuming the agency's information is used?
If Favorable:
If Unfavorable:
e. What is the
f. Is the agency's information worth the $5,000 fee? What is the maximum that Hale should be willing to pay for the information?
Decision:
Hale should pay no more than $ fill in the blank 9.
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