A new product launch is forecast to have a 76% chance of success, which would deliver a textsterling360, 000 profit. It the launch fails, the cost will be textsterling80, 000. What is the expected value?

DECISION MAKING

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

A new product launch is forecast to have a 76% chance of success, which would deliver a £360, 000 profit. It the launch fails, the cost will be £80, 000. What is the expected value?

A	£280, 000
B	£273, 600
C	£254, 400
D	£193, 600

Explanation:

Detailed explanation-1: -One of the advantages of Bayes’ Theorem is that it allows the decision maker to know with certainty all probability values of major outcomes. it is the optimal method for decision making under risk. it replaces EMV analysis.

Detailed explanation-2: -Decision theory provides a formal structure to make rational choices in the situation of uncertainty. Given a set of alternatives, a set of consequences, and a correspondence between those sets, decision theory offers conceptually simple procedures for choice.

Detailed explanation-3: -This protects the decision-maker from undesirable results. Hence, b. the conservative approach is correct.

Detailed explanation-4: -Maximin: Also known as the maximise the minimum. This strategy is considered to be that of a pessimist as it considers the worst possible outcome of all alternatives and the one with the highest minimum is chosen.

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ECONOMICS (CBSE/UGC NET)

ECONOMICS

DECISION MAKING