Jackson is considering launching a new product which it believes has an 80% probability of success. The company, however, is considering undertaking an advertising campaign at a cost of £40,000 which would increase the probability of success to 90%. If successful the product would generate income of £840,000 otherwise £294,000 would be received.
What will be the expected loss or gain from obtaining the additional information?
A) a loss of £40,000
B) a gain of £14,600
C) a gain of £54,600
D) None of the above

Question

Quizplus · Accepted Answer

The expected gain from obtaining the additional information is £14,600. This is calculated as follows:Expected gain from advertising = (Probability of success with advertising * Income if successful) - (Probability of failure with advertising * Income if unsuccessful) - Cost of advertising= (0.9 * £840,000) - (0.1 * £294,000) - £40,000= £756,000 - £29,400 - £40,000= £686,600Expected gain from not advertising = (Probability of success without advertising * Income if successful) - (Probability of failure without advertising * Income if unsuccessful)= (0.8 * £840,000) - (0.2 * £294,000)= £672,000 - £58,800= £613,200Therefore, the expected gain from obtaining the additional information is £686,600 - £613,200 = £14,600.

Jackson Is Considering Launching a New Product Which It Believes