Video Tech is considering marketing one of two new video games

Video Tech is considering marketing one of two new video games for the coming holiday season: Battle Pacific or Space Pirates. Battle Pacific is a unique game and appears to have no competition. Estimated profits (in thousands of dollars) under high, medium, and low demand are as follows:
Demand
Battle Pacific
Profit
Probability

High
$1000
0.2

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Medium
$700
0.5

Low
$300
0.3

Video Tech is optimistic about its Space Pirates game. However, the concern is that profitability will be affected by a competitor’s introduction of a video game viewed as similar to Space Pirates. Estimated profits (in thousands of dollars) with and without competition are as follows.
Demand
Space Pirates
with Competition
Profit
Probability

High

Medium

Low

$800
0.3

$400
0.4

$200
0.3

Demand
Space Pirates
without Competition
Profit
Probability

High

Medium

Low

$1600
0.5

$800
0.3

$400
0.2

a) Develop an influence diagram and a decision tree for the Video Tech problem b) For planning purposes, Video Tech believes there is a 0.6 probability that its competitor will produce a new game similar to Space Pirates. Given this probability of competition, the director of planning recommends marketing the Battle Pacific video game. Using the expected value, what is your recommended
decision?
c) Use sensitivity analysis to determine what the probability of competition for Space Pirates would have to be for you to change your recommended decision alternative.

22. Lawson’s Department Store faces a buying decision for a seasonal product for which demand can be high, medium, or low. The purchaser for Lawson’s can order 1, 2, or 3 lots of the product before the season begins but cannot reorder later. Profit projections (in thousands of dollars) are shown.

Decision Alternative
Order 1 lot, d1
Order 2 lots, d2
Order 3 lots, d3

State of Nature
Medium Demand
s2
60
80
70

High Demand
s1
60
80
100

Low Demand
s3
50
30
10

a) If the prior probabilities for the three states of nature are 0.3, 0.3, and 0.4, respectively, what is the recommended order quantity?

b) At each preseason sales meeting, the vice president of sales provides a personal opinion regarding potential demand for this product. Because of the vice president’s enthusiasm and optimistic nature, the predictions of market conditions have always been either “excellent” (E) or “very good” (V). Probabilities are as follows:
P(E) = 0.70
P(V) = 0.30

P(s1 | E) = 0.34
P(s2 | E) = 0.32
P(s3 | E) = 0.34

P(s1 | V) = 0.20
P(s2 | V) = 0.26
P(s3 | V) = 0.54

What is the optimal decision strategy?
c) Use the efficiency of sample information and discuss whether the firm should consider a consulting expert who could provide independent forecasts of market conditions for the product.