The Dreamscape Production (DP)) 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, DP 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 P100 million. DP's decision alternatives and profits (in millions of pesos) 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 state of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of P5 million, 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 Requirements: [you may attach a word or excel file for requirement (a)] (a) Construct a decision tree for this problem. (b) What is the recommended decision if the agency opinion is not used? What is the expected monetary value? (c) What is the expected value of perfect information? (d) What is Dreamscape's optimal decision strategy assuming the agency's information is used? (e) What is the expected value of the agency's information? (f) Is the agency information worth the P5 million fee? What is the maximum that Dreamscape should be willing to pay for the information? (g) What is the recommended decision?
The Dreamscape Production (DP)) 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, DP 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 P100 million. DP's decision alternatives and profits (in millions of pesos) 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 state of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of P5 million, 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
Requirements: [you may attach a word or excel file for requirement (a)]
(a) Construct a decision tree for this problem.
(b) What is the recommended decision if the agency opinion is not used? What is the expected monetary value?
(c) What is the expected value of perfect information?
(d) What is Dreamscape's optimal decision strategy assuming the agency's information is used?
(e) What is the expected value of the agency's information?
(f) Is the agency information worth the P5 million fee? What is the maximum that Dreamscape should be willing to pay for the information?
(g) What is the recommended decision?
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