Question

The president of a computer company must decide whether to place the company's new laptop on the market now or wait another year and continue with product testing.

The company's employees inform the president that if he releases the laptop now and no competitive devices enter the market, there will be a profit of $120,409.00; however, if he releases the laptop now and a competitive device enters the market, there will only be a small profit of $29,698.00. The company's employees also inform the president that if he waits another year and no competitive device enters the market, there will be a profit of $84,742.00; however, if he waits another year and a competitive device enters the market, there will be a loss of $59,396.00.


Suppose the company determines that there is a 22% chance that a competitive device will enter the market. What should the president do to maximize the expected profit over the next year?

Answer 1

The president should release the new laptop now

Explanation:

The profit if the new laptop is released now and no competitive device enters the market = $120,409.00

The profit if the new laptop is released now and a competitive device enters the market = $29,698

The profit if the new laptop is released in a years time and no competitive device enters the market = $84,742.00

The loss if the new laptop is released in a years time and a competitive device enters the market = $59,396.00

The chance that a competitive device will enter the market = 22%

∴ The chance that a competitive device will not enter the market = 1 - 22% = 78%

The expected increase in profit the company can make, compared to next year, if the new laptop is released and no competitive device enters the market = ($120,409.00 - $84,742.00) × 78% = $27,820.26

The expected increase in profit the company can make, compared to next year, if the new laptop is released and a competitive device enters the market = ($29,698.00 - $59,396.00)×0.22 = ($6,533.56) loss

Therefore, to maximize the expected profit over the next year, the president should release the new laptop now to make an expected profit of $27,820.26 over the next year.