A Firm Hires an Economist to Conduct Market Research and Determine

question 46

Essay

A firm hires an economist to conduct market research and determine demand for a new product. If the test is correct and the firm launches the product, it earns a profit of $600,000. If the firm launches the product when there is weak demand, it incurs a loss of $250,000.
$\begin{array} { | c | c | c | c | } \hline & \text { Strong } & \text { Weak } & \text { Total } \\\hline \text { Accurate } & 0.2 & 0.2 & 0.4 \\\hline \text { Inaccurate } & 0.3 & 0.3 & 0.6 \\\hline & 0.5 & 0.5 & 1.0 \\\hline\end{array}$ What is the firm's expected profit from an accurate and inaccurate test respectively? What can you conclude about the quality of the market research?

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Definitions:

Sherman Act

An antitrust law enacted in 1890 to combat monopolies and cartels, promoting fair competition for the benefit of consumers.

DOJ

The Department of Justice, a federal executive department of the U.S. government responsible for the enforcement of the law and administration of justice.

Concerted Action Requirement

A legal criterion necessitating a cooperative or joint effort among individuals or entities to achieve a particular outcome.

Conscious Parallelism

A situation where firms in an industry independently choose similar pricing, production, or marketing practices without explicit agreement.