XAT 2014 Question 38

Instructions

Read the following case - let and answer the question that follow

Krishna Reddy was the head of a pharmaceutical company that was trying to develop a new product. Reddy, along with his friend Prabhakar Rao, assessed that such products had mixed success. Reddy and Rao realized that if a new product (a drug) was a success, it may result in sales of 100 crores but if it is unsuccessful, the sales may be only 20 crores. They further assessed that a new drug was likely to be successful 50% of times. Cost of launching the new drug was likely to be 50 crores.


Question 38

Now, Reddy and Rao were in a quandary whether the company should go ahead and market the drug. They
contacted Raj Adduri, a common friend for advice. Adduri was of the opinion that given the risky nature of launch, it may be a better idea to test the market. Rao and Reddy realized test marketing would cost 10
crores. Adduri told them the previous test marketing results have been favorable 70% of times and success
rate of products favorably tested was 80%.Further, when test marketing results were unfavorable; the products have been successful 30% of the times.

What is the probability of product failure if Reddy and Rao decide to test market it?

Solution

Results have been favourable 70% of times and success rate of products favourably tested was 80%.

Further, when test marketing results were unfavourable i.e. 30 %; the products have been successful 30% of the times.

The probability of product failure if Reddy and Rao decide to test market it= 7/10$$\times\ $$2/10 + 3/10$$\times\ $$7/10=35/100

=0.35



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