Atlas is setting up in business importing French cheeses. She could open up a small shop, a large outlet, or no shop at all if she decides to sell online only (which she won’t be able to do for another few years at least.) There will be a 5 year lease on a few shops currently available in the centre of town, and Atlas wants to make the correct decision.
Atlas is also thinking about hiring a consultant to conduct a market research study. If the study is conducted, the results could indicate that the cheese market is either favourable or unfavourable.
Atlas believes there is a 50-50 chance that the market will be favourable, and expects her profits to be as follows if she opens her shop:
Favourable market Unfavourable market
Large shop $60,000 ($40,000) loss
Small shop $30,000 ($10,000) loss
The consultant has quoted a charge of $5,000 for the marketing research. He has also hinted that there is a 0.6 probability that the survey will indicate that the cheese market would be favourable.
There is a 0.9 probability that the cheese market will be favourable given a favourable outcome from the study. The consultant warned Atlas that there is only a probability of 0.12 of a favourable market if the marketing research results are not favourable. Atlas has accurately drawn the following decision tree:
Required: A. Explain why Atlas should hire the market research consultant.
B. After discussing the competence of the consultant with another business owner, Atlas now believes that she’d rather contact another market research company which guarantees perfect information concerning the cheese market profitability.
Calculate the value of this perfect information.