To solve: A manufacturer of high-tech computing equipment must decide whether or not to continue development of a new promising technology. Continuing the development would cost $2 Million. If the development is continued, then a patent is either awarded or not. 70% chance that the patent will be awarded and The best estimate is that there is a 30% chance that it will not. if the patent is awarded the company needs to decide whether or not to license the technology. if it does, it would receive a total of $2.5 million in licensing royalties. However, the company could also produce and sell the technology in-house (at a cost of $10 million), in which case there is an additional uncertainty about the demand for the technology. if the demand is high (p = 0.25), the would make $55 Million in :company revenues, if the demand is medium (p = 0.55) the company would make $33 Million and if the demand is Low (p = 0.20) the company would still make $15 Million. - a) Draw and solve a decision tree for this situation, assuming that the decision maker is risk neutral. b) should the company continue the development of the technology and, if it does, should it license it or produce it in-house in case a patent is awarded? Something to keep in mind: include all relevant calculations and your conclusions in the drawing.
To solve: A manufacturer of high-tech computing equipment must decide whether or not to continue development of a new promising technology. Continuing the development would cost $2 Million. If the development is continued, then a patent is either awarded or not. 70% chance that the patent will be awarded and The best estimate is that there is a 30% chance that it will not. if the patent is awarded the company needs to decide whether or not to license the technology. if it does, it would receive a total of $2.5 million in licensing royalties. However, the company could also produce and sell the technology in-house (at a cost of $10 million), in which case there is an additional uncertainty about the demand for the technology. if the demand is high (p = 0.25), the would make $55 Million in :company revenues, if the demand is medium (p = 0.55) the company would make $33 Million and if the demand is Low (p = 0.20) the company would still make $15 Million. - a) Draw and solve a decision tree for this situation, assuming that the decision maker is risk neutral. b) should the company continue the development of the technology and, if it does, should it license it or produce it in-house in case a patent is awarded? Something to keep in mind: include all relevant calculations and your conclusions in the drawing.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:To solve:
A manufacturer of high-tech computing equipment must decide whether or not to
continue development of a new promising technology. continuing the development would
cost $2 Million. If the development is continued, then a patent is either awarded or not.
70% chance that the patent will be awarded and
The best estimate is that there is a
a 30% chance that it will not.
if the patent is awarded, the company needs to decide whether or not to license the
technology. it does, it would receive a total of $25 million in licensing royalties.
However, the
company
could also produce and sell the technology in-house (at. a cost of
$10 million), in which case there is an additional uncertainty about the demand for the
technology. if the demand is high (p = 0.25), the company would make $55 Million in
revenues, if the demand is medium (p = 0.55) the company would make $33 Million and if
the demand is Low (p = 0.20) the company would still make $15 Million.
a) Draw and solve a decision tree for this situation, assuming that the decision maker
is risk neutral
b) should the company continue the development of the technology and, if it does,
should it license it or produce it in-house in case a patent is awarded?
Something to keep in mind: Include all relevant calculations and your conclusions in the
drawing.
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