The Head of Operations for a Movie Studio Wants to Determine

question 8

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. She feels that script #1 has a 70% chance of earning $100 million over the long run, but a 30% chance of losing $20 million. If this movie is successful, then a sequel could also be produced, with an 80% chance of earning $50 million, but a 20% chance of losing $10 million. On the other hand, she feels that script #2 has a 60 % chance of earning $120 million, but a 40% chance of losing $30 million. If successful, its sequel would have a 50% chance of earning $80 million and a 50% chance of losing $40 million. As with the first script, if the original movie is a "flop," then no sequel would be produced.
What is the expected payoff for the optimum decision alternative?

• A) $150 million
• B) $90.6 million
• C) $84 million
• D) $72 million
• E) $60 million

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