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Production company Puupaat Oy has come up with a notion for a new television serial. Developing the notion into a concept would cost e 1.5m. New concepts have an equal chance of being either good or not. If they are not good, there is an equal chance of being either brilliant or bad. The cost of turning a concept into an idea is e 2m of which the production company could pay for only half, so an outside investor would be required to move forward. An outside investor must be promised 50% of the revenue in case the idea is sold. Investors cannot observe quality, only revenue. Finally, an idea can be sold to a major network at a price that depends on the state of the economy and the quality of the idea. In a normal economy a high-quality idea can be sold for e24m, a low-quality idea for e9m, and an ordinary no-quality idea for nothing. In a booming economy the prices of ideas double; this has a one-in-three chance. Brilliant concepts would always turn to high quality ideas, whereas the merely good concepts never turn out high quality and are twice as likely to turn out low rather than ordinary quality. Bad concepts have 25% chance of turning into high-quality ideas; else they have no quality.

(a) Draw the decision tree facing the production company. What is the optimal decision and expected value?

(b) The share (%) of revenue that must be promised to outside investors could be different. At what point (if any) would it change the optimal decision of whether to develop the notion into a concept?

(c) What would be the value of a perfect forecast about the state of the economy to the production company at the initial stage in this decision?

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