A) Suppose A Studio Manager Is Thinking About Whether Or Not To Produce A Movie (Movie X) A Movie Can Become A

Question

a) Suppose a studio manager is thinking about whether or not to produce a movie (movie X). A movie can become a

blockbuster, which will generate a net profit of $10M, or it can become a failure, in which case it will generate a net loss of $4M. The studio manager estimates that movie X has a 50-50 chance of becoming a blockbuster or a failure.

Now a marketing research company offers to provide a research service that allows the studio to know in advance whether movie X will be a blockbuster or a failure.

i. Without doing any marketing research, what is the expected profit/loss if the studio produces movie X?

ii. Without doing any marketing research, should the studio go ahead and product movie X?

iii. How much (in terms of $) is this marketing research service worth to the studio?

b) Repeat question (a). This time, however, assume that the studio can still make a net profit of $2M (rather than a net loss of $4M) even though the movie is a failure. How would your answer to (a) (i), (ii), (iii) change as a result?

Marketing