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?