TV production company XYZ is producing a pilot for a TV series and is targeting at a major network. XYZ is considering to sell it to the major network, but it will take several months for the network to make a decision. The network may reject the series or decide to purchase the rights to the series for one year or two years. At this point in time, XYZ may either wait for the network’s decision or transfer the rights for the pilot and series to a competitor for $200,000. If waiting for the network’s decision, XYZ would lose $200,000 when the series is rejected; the company’s expected profit would be $150,000 if the network purchases the rights for one year and the expected profit would be $450,000 if the network purchases the rights for two years. The probabilities for the network to reject the series, purchase the rights for one year, purchase for two years are 0.20, 0.30, and 0.50, respectively. XYZ can hire an agency for a consulting fee of $15,000 to review the plans for the series and the agency will estimate the overall chances that the series would receive a favorable network reaction or an unfavorable reaction. Following information is available: Prob (Favorable review) = 0.69, Prob (Unfavorable review) = 0.31. Given a favorable review, Prob(rejection) = 0.09, Prob(buy for one year) = 0.26, Prob(buy for two years) = 0.65. Given an unfavorable review, Prob(rejection) = .45, Prob(buy for one year) = 0.39, Prob(buy for two years) = 0.16. Construct a decision tree for the problem. Make a recommendation to the company as to what actions to take and what outcomes might be in terms of the expected payoff based on the decision tree solution. Compute the expected value of the perfect information for this decision problem. Compute the expected value of the agency’s information. Is the agency’s information worth $15,000? Create a table for input parameters, and a table for outcomes, and link them to the decision tree so it would show the new solution by simply changing the value of an input parameter. Use 5 to answer the following two questions: What would the maximum expected payoff be if the consulting fee were $20,000? What would the maximum payoff be if the prior probabilities for the network to reject the series, purchase the rights for one year, purchase for two years are 0.25, 0.25, and 0.50, respectively? How would the agency consulting fee impact the optimal strategy and payoff? In order to answer the question, you need to create a data table, which should include a list of consulting fee scenarios (from $10,000 to $40,000 with an increment of $1,000) and their outcomes so the company knows what actions to take for different ranges of fee. Summary the result from the data table in your answer.

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TV production company XYZ is producing a pilot for a TV series and is targeting at a major network. XYZ is considering to sell it to the major network, but it will take several months for the network to make a decision. The network may reject the series or decide to purchase the rights to the series for one year or two years. At this point in time, XYZ may either wait for the network’s decision or transfer the rights for the pilot and series to a competitor for $200,000. If waiting for the network’s decision, XYZ would lose $200,000 when the series is rejected; the company’s expected profit would be $150,000 if the network purchases the rights for one year and the expected profit would be $450,000 if the network purchases the rights for two years. The probabilities for the network to reject the series, purchase the rights for one year, purchase for two years are 0.20, 0.30, and 0.50, respectively.

XYZ can hire an agency for a consulting fee of $15,000 to review the plans for the series and the agency will estimate the overall chances that the series would receive a favorable network reaction or an unfavorable reaction. Following information is available:

Prob (Favorable review) = 0.69, Prob (Unfavorable review) = 0.31.

Given a favorable review,

Prob(rejection) = 0.09, Prob(buy for one year) = 0.26, Prob(buy for two years) = 0.65.

Given an unfavorable review,

Prob(rejection) = .45, Prob(buy for one year) = 0.39, Prob(buy for two years) = 0.16.

  1. Construct a decision tree for the problem.
  2. Make a recommendation to the company as to what actions to take and what outcomes might be in terms of the expected payoff based on the decision tree solution.
  3. Compute the expected value of the perfect information for this decision problem.
  4. Compute the expected value of the agency’s information. Is the agency’s information worth $15,000?
  5. Create a table for input parameters, and a table for outcomes, and link them to the decision tree so it would show the new solution by simply changing the value of an input parameter.
  6. Use 5 to answer the following two questions: What would the maximum expected payoff be if the consulting fee were $20,000? What would the maximum payoff be if the prior probabilities for the network to reject the series, purchase the rights for one year, purchase for two years are 0.25, 0.25, and 0.50, respectively?
  7. How would the agency consulting fee impact the optimal strategy and payoff? In order to answer the question, you need to create a data table, which should include a list of consulting fee scenarios (from $10,000 to $40,000 with an increment of $1,000) and their outcomes so the company knows what actions to take for different ranges of fee. Summary the result from the data table in your answer.
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