The Head of Operations for a Movie Studio Wants to Determine

question 129

Multiple Choice

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production. (Due to budgeting constraints, only one new picture can be undertaken at this time.) She feels that script 1 has a 70 percent chance of earning about $10,000,000 over the long run, but a 30 percent chance of losing $2,000,000. If this movie is successful, then a sequel could also be produced, with an 80 percent chance of earning $5,000,000, but a 20 percent chance of losing $1,000,000. On the other hand, she feels that script 2 has a 60 percent chance of earning $12,000,000, but a 40 percent chance of losing $3,000,000. If successful, its sequel would have a 50 percent chance of earning $8,000,000, but a 50 percent chance of losing $4,000,000. Of course, in either case, if the original movie were a flop, then no sequel would be produced.
What is the expected value for the optimum decision alternative?

• A)$15,000,000
• B)$9,060,000
• C)$8,400,000
• D)$7,200,000
• E)$6,000,000

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Definitions:

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A violation of another person’s rights or a civil wrongdoing that does not arise out of a contract or statute; primary types are intentional, negligent, and strict-liability torts.

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Monetary compensation awarded by a court to a person who has suffered loss or injury due to the unlawful act or omission of another.

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