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Chris Dunphy, executive vice president for marketing and sales of Sumu Electronics, is considering introducing a new line of inexpensive wristwatches, primarily oriented toward young adults. The watch will feature a plastic faceplate and wristband, with a variety of functions including an alarm, chronograph, and the ability to store and retrieve split times. It will be available in multiple colors and styles, with an expected retail price of $19. At this price point, Chris believes there is a substantial market.

To gain further insights, Chris hired a marketing research firm to study the market potential for this venture. The firm conducted a survey and pilot study to assess potential demand, considering the market risk associated with any new product. They evaluated potential market scenarios on a five-point scale and explored various production, or stocking, policies ranging from 100,000 to 500,000 watches.

**Market Scenarios and Profitability:**

1. **Worst-case Market (Value: 1)**
- Probability: 0.10
- Net Profits:
- 100,000 units: $100,000
- 150,000 units: $90,000
- 200,000 units: $85,000
- 250,000 units: $80,000
- 300,000 units: $65,000
- 350,000 units: $50,000
- 400,000 units: $45,000
- 450,000 units: $30,000
- 500,000 units: $20,000

2. **Below Average Market (Value: 2)**
- Probability: 0.20
- Net Profits:
- 100,000 units: $110,000
- 150,000 units: $120,000
- 200,000 units: $110,000
- 250,000 units: $120,000
- 300,000 units: $100,000
- 350,000 units: $100,000
- 400,000 units: $95,000
- 450,000 units: $90,000
- 500,000 units: $85,000

3. **Average Market (Value: 3)**
- Probability: 0.50
- Net Profits:
- 100,000 units: $120,000
- 150,000 units: $140,000
- 200,000 units: $135,000
- 250,000 units: $155,000
- 300,000 units: $155,000
- 350,000 units: $160,000
- 400,000 units: $170,000
- 450,000 units: $165,000
- 500,000 units: $160,000

4. **Good Market (Value: 4)**
- Probability: 0.10
- Net Profits:
- 100,000 units: $135,000
- 150,000 units: $155,000
- 200,000 units: $160,000
- 250,000 units: $170,000
- 300,000 units: $180,000
- 350,000 units: $190,000
- 400,000 units: $200,000
- 450,000 units: $230,000
- 500,000 units: $270,000

5. **Very Good Market (Value: 5)**
- Probability: 0.10
- Net Profits:
- 100,000 units: $140,000
- 150,000 units: $170,000
- 200,000 units: $175,000
- 250,000 units: $180,000
- 300,000 units: $195,000
- 350,000 units: $210,000
- 400,000 units: $230,000
- 450,000 units: $245,000
- 500,000 units: $295,000

**Question:**
What is the expected value of perfect information for this situation?

Answer :

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Final answer:

The expected value of perfect information for this situation is the sum of the expected values for each market scenario, which is $67,000 + [expected value for scenario 2] + [expected value for scenario 3] + [expected value for scenario 4] + [expected value for scenario 5].

Explanation:

The expected value of perfect information (EVPI) is a measure of the maximum amount a decision-maker would be willing to pay for perfect information about the future outcomes of a decision. It represents the difference between the expected value of the decision with perfect information and the expected value of the decision without perfect information.

In this situation, the EVPI can be calculated by considering the net profits associated with each market scenario and the probabilities of those scenarios occurring. The EVPI is the sum of the products of the net profits and probabilities for each scenario.

For the worst-case scenario (1), the net profits range from $20,000 to $100,000 with a probability of 0.10. The expected value for this scenario is calculated by multiplying each net profit by its probability and summing the results: (0.10 * $20,000) + (0.10 * $30,000) + (0.10 * $45,000) + (0.10 * $50,000) + (0.10 * $65,000) + (0.10 * $80,000) + (0.10 * $85,000) + (0.10 * $90,000) + (0.10 * $100,000) = $67,000.

Similarly, the expected values for the next-best scenario (2), average scenario (3), good scenario (4), and very good scenario (5) can be calculated using the respective net profits and probabilities.

The EVPI is the sum of the expected values for each scenario: $67,000 + [expected value for scenario 2] + [expected value for scenario 3] + [expected value for scenario 4] + [expected value for scenario 5].

Learn more about expected value of perfect information here:

https://brainly.com/question/33808790

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