Solution Library

Royalty Calculation For Sale Of Books

Question

Eileen O'Donnell is trying to choose between two publishing companies that are competing for the marketing rights to her new novel. Company A has offered $10,000 plus $2 per book sold. Company B has offered $2,000 plus $4 per book sold. The author believes that five levels of demand (states of nature) for the book are possible: 1,000, 2,000, 5,000, 10,000 and 50,000 books sold.

(a) Compute the payoffs for each company's offer at each level of demand.

(b) Set up a payoff table indicating decision alternatives and states of nature, together with the amount the author would earn under each possible combination.

(c) Set up a decision tree. Here are probabilities associated with the demand levels:

Demand     Probability
 1,000             0.45
 2.000             0.20
 5,000             0.15
10.000            0.10
50,000            0.10

(d) Determine the expected value and standard deviation of Eileen's earnings from signing with each of the two companies.

(e) Compute and explain the expected value of perfect information.

The Bodnar Croup, a literary review organization, has an outstanding reputation for predicting the success of original works of fiction, based on its famous "thumbs up" or "thumbs down" evaluations. In the past, for novels that have eventually sold 1,000 copies, only 1% had received "thumbs up" from Bodnar prior to publication. Of novels that eventually sold 2,000 copies, 5% had received "thumbs up" from Bodnar prior to publication. Similarly, 25% of novels that sold 5,000 copies had received "thumbs up", 60% of novels that sold 10,000 copies had received "thumbs up", and 99% of novels that sold 50,000 copies had received "thumbs up".

(f) Eileen submits the novel to Bodnar and receives a "thumbs down". What is the implication of this evaluation for Eileen's choice of publishers?

(g) What is the expected value and the efficiency of a Bodnar review in this problem?

Summary

The question belongs to Finance and it is about calculating the pay off to an author in the form of fixed amount plus royalty on each book sold. The author needs help in calculating the probability of anticipating the demand for the books.

Total Word Count NA


 

Download Full Solution

Comments

  • HWA
    Rasha

    this is a very good website

  • HWA
    maani

    I have 50 questions for the same test your page is showing only 28

  • HWA
    joeanne

    hi can you please help or guide me to answer my assignments. thanks

  • HWA
    joeanne

    hi can anyone help or guide me to my assignments. thanks

  • HWA
    Monik


  • HWA
    Cristina

    This solution is perfect ...thanks

  • HWA
    Janete

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA
    Sandeep

    Perfect bank of solution. 

  • HWA
    Oxana

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA
    Giuseppe

    works fine.