Consider a company faced with a​ competitor's price reduction. Should the company also reduce price in order to maintain market share or should the company maintain its current​ price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor​ responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability ​(p​) of 0.7​, which means the other outcome would have only a 30 percent chance of occurring ​(1-p=0.3​). These outcomes are shown in the table​ below:Competitive ResponseCompany action Maintain Price, p=0.7 Reduce Price, (1-p)=0.3Reduce Price $155,000 $125,000Maintain Price $165,000 $95,000What is the expected value of perfect information ​(EMV Subscript PI​)? Should the research be​ conducted? Assume that conducting more research costs ​$15,000.

Question

Consider a company faced with a​ competitor's price reduction. Should the company also reduce price in order to maintain market share or should the company maintain its current​ price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor​ responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability ​(p​) of 0.7​, which means the other outcome would have only a 30 percent chance of occurring ​(1-p=0.3​). These outcomes are shown in the table​ below:

Competitive Response
Company action Maintain Price, p=0.7 Reduce Price, (1-p)=0.3
Reduce Price $155,000 $125,000
Maintain Price $165,000 $95,000

What is the expected value of perfect information ​(EMV Subscript PI​)? Should the research be​ conducted? Assume that conducting more research costs ​$15,000.

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