Question

Embassy Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a 0.6 probability that the textbook will be successful. If successful, a profit of $350,000 will be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of $50,000 will occur. Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F) or unfavorable (U) evaluation of the manuscript. Past experience with the review process suggests that probabilities P(F) = 0.6 and P(U)= 0.4 apply. Let si= the textbook is successful, and s2 = the textbook is unsuccessful. The editor's initial probabilities of si and s2 will be revised based on whether the review is favorable or unfavorable. The revised probabilities are as follows: P(s1|F) = 0.25 P(s1| U)= 0.405 P(52 F) = 0.75 P(s2|U) = 0.595

a. Construct a decision tree assuming that the company will first make the decision of whether to send the manuscript out for review and then make the decision to accept or reject the manuscript.

Answer 1

A decision tree for Embassy Publishing Company indicates the steps of reviewing a manuscript, evaluating its potential based on the review, and deciding whether to publish, with associated profits or losses based on revised probabilities of success or failure after the review.

Step-by-step explanation:

The student's question involves constructing a decision tree for the Embassy Publishing Company to make an informed decision on whether to publish a college textbook. To construct the decision tree, we start with the initial decision of sending the manuscript out for review or not, followed by the subsequent decision to publish the textbook if the review is favorable or unfavorable.

The outcomes, which include success or failure of the textbook, each have associated probabilities and financial implications. A successful textbook yields a profit of $350,000, whereas an unsuccessful one results in a $50,000 loss. These outcomes are updated based on the review feedback, with revised probabilities of success or failure given a favorable (F) or unfavorable (U) review.

Decision Tree Structure:

1. Decision to review or not review the manuscript.
2. If reviewed, receive either favorable (F) or unfavorable (U) feedback.
3. Based on feedback, decide to accept (publish) or reject the manuscript.
4. Estimate profits or losses based on success (s1) or failure (s2) probabilities after decision points.

The review process provides probabilities of a favorable review P(F) = 0.6 and an unfavorable review P(U) = 0.4. If the feedback is favorable, the probability of the book being successful becomes P(s1|F) = 0.25 while P(s2|F), the probability of being unsuccessful, is 0.75. Conversely, if the review is unfavorable, the updated probabilities are P(s1|U) = 0.405 and P(s2|U) = 0.595 for success and failure, respectively.