Question

Your company has finished working on an open world video game, CyberPerson 2080. You now have a decision to make. You can auction your game off to a publisher, or you can keep your game and do the marketing and publishing yourself. If you auction your game off, your analytics team estimates there is a 25% chance you will earn $5 million, a 35% chance you will earn $12 million, and a 40% chance you will earn $16 million. If you keep your game, your marketing and publishing costs will be $7 million. If you keep your game, your analytics team estimates there is a 30% chance your game will be a critical and commercial hit, a 25% chance your game will sell well and make gross revenues of $12 million, and a 45% chance another similar game will come out at the same time and you will make gross revenues of $1 million.

If your game is a critical and commercial hit, there is a 60% chance it is on the "best of the year" lists and makes gross revenues of $64 million, a 35% chance it stays on the top seller lists for weeks and makes gross revenues of $28 million, and a 5% chance it makes gross revenues of $18 million. Assume you make decisions using expected value, and you are an expected value maximizer. If you make the optimal decision, how much will you expect to earn from your game?

Answer 1

CyberPerson 2080

If you make the optimal decision, the amount you will expect to earn from your game is:

= $11.85 million.

Step-by-step explanation:

a) Data and Calculations:

Expected value of game being a critical and commercial hit:

Probability Gross Revenue Expected Revenue

60% $64 million $38.4 million

35% 28 million 9.8 million

5% 18 million 0.9 million

100% $49.1 million

Value of auctioning game:

Probability Gross Revenue Expected Revenue

25% $5 million $1.25 million

35% $12 million $4.20 million

40% $16 million $6.40 million

100% $11.85 million

Value of keeping game:

Probability Gross Revenue Expected Revenue

100% -$7 million -$7.00 million

30% $49.1 million $14.73 million

25% $12 million $3.00 million

45% $1 million $0.45 million

100% $11.18 million

b) The optimal solution will be to auction the game and make $11.85 million, which is higher than $11.18 million made from keeping the game and doing the marketing and publishing.