Consider again Techware’s decision problem described in Problem 38. Suppose now that Techware’s utility function of net revenue x (measured in dollars), earned from the given marketing opportunities,...

Consider again Techware’s decision problem described in Problem 38. Suppose now that Techware’s utility function of net revenue x (measured in dollars), earned from the given marketing opportunities, is U(x)= 1-e^-x/350000.


a.  Find the course of action that maximizes Techware’s expected utility. How does this optimal decision compare to the optimal decision with an EMV criterion? Explain any difference in the two optimal decisions.


b.  Repeat part a when Techware’s utility function is U(x) =1-e^-x/50000.

Problem 38

Techware Incorporated is considering the introduction of two new software products to the market. In particular, the company has four options regarding these two proposed products: introduce neither product, introduce product 1 only, introduce product 2 only, or introduce both products. Research and development costs for products 1 and 2 are $180,000 and $150,000, respectively. Note that the first option entails no costs because research and development efforts have not yet begun. The success of these software products depends on the trend of the national economy in the coming year and on the consumers’ reaction to these products. The company’s revenues earned by introducing product 1 only, product 2 only, or both products in various states of the national economy are given in the file P10_38.xlsx. The probabilities of observing a strong, fair, or weak trend in the national economy in the coming year are 0.30, 0.50, and 0.20, respectively.

a.  Create a payoff table that specifies Techware’s net revenue (in dollars) for each possible decision and each outcome with respect to the trend in the national economy.

b.  Use PrecisionTree to identify the strategy that maximizes Techware’s expected net revenue from the given marketing opportunities.

c.  Perform a sensitivity analysis on the optimal decision and summarize your findings. In response to which model inputs is the expected net revenue value most sensitive?