A

The Alpha Company is trying to decide whether to market a new

product. As in many new-product marketing situations, there is
considerable uncertainty about whether the new product will
eventually “catch on.” Alpha believes that it might be wise to introduce
the product in a regional test market before introducing it nationally.
Therefore, the company’s first decision is whether to conduct the test
market. If Alpha decides to conduct the test market, it must then wait
for the results of the test market. Based on these results, it can then
decide whether to market the product nationally or abandon the new
product altogether. On the other hand, if the original decision is not to
conduct a test market, then the decision – whether to market the
product nationally or abandon the new product – can be made
immediately. Furthermore, Alpha has estimated that without a regional
test, the new product is equally likely to be successful or to fail
nationally. Alpha has also estimated that if the new product is a “good”
product (i.e., it will be successful nationally), then the probability that
the regional test is positive is 0.84 (which implies that the probability
of a negative regional test is 0.16); if the new product is a “bad”
product (i.e., it will fail nationally), then the probability that the
regional test is negative is 0.64 (which implies that the probability of a
positive regional test is 0.36).

“To test market or not to test market?”

(a) Compute the probability table for this problem. (A hint on

notation: please use S and F to denote the event of a national
success and failure, respectively; use P and N to denote the
event of a regional positive result and negative result,
respectively.) What is the conditional probability of a national
success given that the test market result is positive? What is the
conditional probability of a national failure given that the test
market result is negative?

(b) Construct a decision tree for this problem. Be sure to clearly

mark each node (whether it is a decision node or event node),
the decision or event of each branch, and the probability for each
event branch.

B
There are two sealed envelopes, each containing an amount of
money; the amount of money is either Rs.5K, Rs.10K, Rs.20K, or
Rs.40K and everybody knows this. Furthermore, it is also known to all
that one envelope contains exactly twice as much money as
the other. The two envelopes are shuffled, and we give one envelope
to you and one to your opponent. After the envelopes are opened (but
the amounts inside are kept private) you and your opponent are given
the opportunity to switch. If you both want to switch, we let you.

Find the optimal strategy for playing this game. A strategy identifies
what you would do under all situations. Thus for this example you
need to decide between switch and don't switch for any amount of
money you are looking at.

Amount of Decision (you need to select one)

money in
your
envelope
Rs. 5K Offer to switch, Do not offer to switch
Rs. 10 Offer to switch, Do not offer to switch
Rs. 20 Offer to switch, Do not offer to switch
Rs. 40 Offer to switch, Do not offer to switch