A television network earns an average of $400,000 from a hit show and loses an average of $100,000 on a flop. Of all shows reviewed by the network, 25% turn out to be hits and 75% turn out to be flops. For $40,000, a market research firm will have an audience view a pilot of a prospective show and give its view about whether the show will be a hit or a flop. If a show is actually going to be a hit, there is a 90% chance that the market research firm will predict the show to be a hit. If the show is actually going to be a flop, there is an 80% chance that the market research firm will predict the show to be a flop.
Question #1: Determine how the network can maximize its expected profits. Show your calculations. Verbally communicate the decision strategy.
Question #2: Find the Expected Value of Sample information (EVSI), which is the maximum amount that the network is willing to pay the market research firm.
Question #3: Find the expected Value of Perfect Information (EVPI). Hint: build a payoffs table without the additional information.
Question #4: Let p = prior probability for hit. Solve for the value of p at the point where you are indifferent between air the show or not air the show. Hint: use the payoff table from Question #3.