An entertainment company is organizing a pop concert in

An entertainment company is organizing a pop concert in London.Thecompany

has to decide how much it should spend on publicizing the event, and three

options have been identified:

Option 1: Advertise only in the music press;

Option 2: As option 1, but also advertise in the national press;

Option 3: As options 1 and 2, but also advertise on commercial radio.

For simplicity, the demand for tickets is categorized as low, medium or high.

The payoff table below shows how the profit that the company will earn for

each option depends on the level of demand:


Option  Low  Medium  High  Profits ($000s)

1 −20  −20 100

2 −60  −20 60

3 −100  −60 20

It is estimated that if option 1 is adopted the probabilities of low, medium

and high demand are 0.4, 0.5 and 0.1 respectively. For option 2 the respective

probabilities are 0.1, 0.3 and 0.6, while for option 3 they are 0.05, 0.15 and 0.8.

Determine the option that will lead to the highest expected profit. Would you

have any reservations about recommending this option to the company?

Calculate the price