1. A company developed a promising product and wants to make a decision. Based on the best available

1. A company developed a promising product and wants to make a decision. Based on the best available information, a decision tree was drawn.

Payoff $ millions) (.5) Large Market Produce & Market (.5) Low Mkt. 2.0 (.5) Large Market Develop Sell Idea 3.0 Product (.5) Low Mkt. 1.0 Lease for Royalty (.5) Large Market 2.2 Sell Idea CompanyA (.5) Low Mkt. 1.2 (.5) Large Market Company EB 1.9 (.5) Low Mkt. 1.3 1.0

a) Calculate expected value at every node.

b) If they “develop the product” & “produce & market”, how much can it expect?

c) What is the optimum decision?

Payoff $ millions) (.5) Large Market Produce & Market (.5) Low Mkt. 2.0 (.5) Large Market Develop Sell Idea 3.0 Product (.5) Low Mkt. 1.0 Lease for Royalty (.5) Large Market 2.2 Sell Idea CompanyA (.5) Low Mkt. 1.2 (.5) Large Market Company EB 1.9 (.5) Low Mkt. 1.3 1.0

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