Jackson Is Considering Launching a New Product Which It Believes

question 5

Multiple Choice

Jackson is considering launching a new product which it believes has an 80% probability of success. The company, however, is considering undertaking an advertising campaign at a cost of £40,000 which would increase the probability of success to 90%. If successful the product would generate income of £840,000 otherwise £294,000 would be received.
What will be the expected loss or gain from obtaining the additional information?

• A) a loss of £40,000
• B) a gain of £14,600
• C) a gain of £54,600
• D) None of the above

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Definitions:

Expected Utility

A theory in economics that quantifies the usefulness an individual expects to gain from consuming a good or choosing a particular action.

Risk-loving

A preference for or an inclination towards taking high risks in pursuit of high rewards, often in the context of investment or economic decisions.

Risk-loving

A preference for options with uncertain outcomes, rather than those with more predictable results, often with the hope of higher rewards.

Marginal Utility

The supplementary enjoyment or value obtained by consuming another unit of a good or service.