A company is about to launch a new product and is considering one of two prices: high or low. However, the company is uncertain about the market response to the product - whether demand will be strong or weak. According to the firm's marketing department, the probability of strong demand is .6 and of weak demand is .4. The following table lists the firm's economic profit (in millions of dollars) at the two prices under strong and weak demand:
(a) Suppose the company is risk neutral and must commit to a price before knowing what the market response will be. Should it launch the product? If so, at what price?
(b) The company is considering spending $10 million to test market the product on a national scale. In the process, it will learn the exact market response (strong or weak demand) before having to decide on a final launch and pricing strategy. Should it go ahead with the market test?
(c) Suppose instead that the company can hire a marketing consultant to undertake a limited market survey in the Midwest. The company anticipates that the consultant will come back with one of two possible demand forecasts: favorable (F) or unfavorable (U). In the past, the consultant's forecast accuracy has been as follows: Pr(F|S) = .8 and Pr(U|W) = .6. Compute the revised probabilities, Pr(S|F) and Pr(S|U).

Question

A company is about to launch a new product and is considering one of two prices: high or low. However, the company is uncertain about the market response to the product - whether demand will be strong or weak. According to the firm's marketing department, the probability of strong demand is .6 and of weak demand is .4. The following table lists the firm's economic profit (in millions of dollars) at the two prices under strong and weak demand:
  (a) Suppose the company is risk neutral and must commit to a price before knowing what the market response will be. Should it launch the product? If so, at what price?
(b) The company is considering spending $10 million to test market the product on a national scale. In the process, it will learn the exact market response (strong or weak demand) before having to decide on a final launch and pricing strategy. Should it go ahead with the market test?
(c) Suppose instead that the company can hire a marketing consultant to undertake a limited market survey in the Midwest. The company anticipates that the consultant will come back with one of two possible demand forecasts: favorable (F) or unfavorable (U). In the past, the consultant's forecast accuracy has been as follows: Pr(F|S) = .8 and Pr(U|W) = .6. Compute the revised probabilities, Pr(S|F) and Pr(S|U).

Quizplus · Accepted Answer

The Answer of A company is about to launch a new product and is considering one of two prices: high or low. However, the company is uncertain about the market response to the product - whether demand will be strong or weak. According to the firm's marketing department, the probability of strong demand is .6 and of weak demand is .4. The following table lists the firm's economic profit (in millions of dollars) at the two prices under strong and weak demand:
  (a) Suppose the company is risk neutral and must commit to a price before knowing what the market response will be. Should it launch the product? If so, at what price?
(b) The company is considering spending $10 million to test market the product on a national scale. In the process, it will learn the exact market response (strong or weak demand) before having to decide on a final launch and pricing strategy. Should it go ahead with the market test?
(c) Suppose instead that the company can hire a marketing consultant to undertake a limited market survey in the Midwest. The company anticipates that the consultant will come back with one of two possible demand forecasts: favorable (F) or unfavorable (U). In the past, the consultant's forecast accuracy has been as follows: Pr(F|S) = .8 and Pr(U|W) = .6. Compute the revised probabilities, Pr(S|F) and Pr(S|U).

A Company Is About to Launch a New Product and Is