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Probability & Statistics for Business and

 

Economics Bonus Problem

 


 

Jeffrey Mogul is a Hollywood film producer and he

 

is currently evaluating a script by new

 

screenwriter and director, Betty Jo Thurston.

 

Jeffrey

 

knows that the probability of a film by a new

 

director being a success is about .10 and the

 

probability it will flop is .90. The studio

 

accounting department estimates that if this film

 

is a hit, it will make $25 million

 

in profit, whereas if it is a box office failure, it

 

will lose $8 million.

 

Jeffrey would like to hire noted film critic

 

Dick Roper to read the script and

 

assess its chances of success. Roper is generally able to

 

correctly predict a successful film 70% of the time and

 

correctly predict an unsuccessful film 80% of the time. Roper

 

wants a fee of $1 million.

 

Success

 

Produce Film

 

Don?t Produce Film

 


 

Flop

 


 

EMVs

 


 

$25M

 

$0

 


 

-$8M

 

$0

 


 

-$4.7M

 

$0

 


 

1. (8 points) Determine the revised (posterior) probability for each state of nature

 


 

(round at 2 decimals)

 

2. (8 points) Determine the strategy Mogul should follow if Roper is hired ( i.e.

 

recalculate EMVs based on good review and bad review).

 

3. (4 points) Determine the expected value of the strategy.

 


 

 


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