A wily marketing director must decide among four alternatives for a new marketing campaign.She ascertains that the probability of high demand is 0.8 and the probability of low demand is 0.2.What is the best choice with the payoffs shown in the tree?

A) Alternative A
B) Alternative B
C) Alternative C
D) Alternative D

Question

A wily marketing director must decide among four alternatives for a new marketing campaign.She ascertains that the probability of high demand is 0.8 and the probability of low demand is 0.2.What is the best choice with the payoffs shown in the tree?

A) Alternative A 
B) Alternative B 
C) Alternative C 
D) Alternative D

Quizplus · Accepted Answer

Alternative B has the highest expected payoff, which is the probability-weighted average of the payoffs of high and low demand for each alternative. Expected payoffs for each alternative are: 
Alternative A: 0.5(5) + 0.5(0) = 2.5 
Alternative B: 0.8(10) + 0.2(-5) = 7 
Alternative C: 0.8(7) + 0.2(3) = 6.4 
Alternative D: 0.5(0) + 0.5(15) = 7.5 
Therefore, the best choice is Alternative B.

A Wily Marketing Director Must Decide Among Four Alternatives for a New