Instructions

Answer questions based on the following information:

An automobiles company’s annual sales of its small cars depends on the state of the economy as well as on whether the company uses some high profile individual as its brand ambassador in advertisements of its product. The state of the economy is “good”, “okay” and “bad” with probabilities 0.3, 0.4 and 0.3 respectively. The company may choose a high profile individual as its brand ambassador in TV ads or may go for the TV ads without a high profile brand ambassador.

If the company fixes price at Rs. 3.5 lakh, the annual sales of its small cars for different states of the economy and for different kinds of TV ads are summarized in table 1. The figures in the first row are annual sales of the small cars when the company uses a high profile individual as its brand ambassador in its TV ads and the ones in the second row are that when the company does not use any brand ambassador in TV ads, for different states of the economy.
Table 1:

Without knowing what exactly will be the state of the company in the coming one year, the company will either have to sign a TV ad contract with some high profile individual, who will be the company’s brand ambassador for its small car for the next one year, or go for a TV ad without featuring any high profile individual. It incurs a cost of Rs. 3.45 lakh (excluding the payment to the brand ambassador) to put a car on the road.

When the company’s profit is uncertain, the company makes decisions on basis of its expected profit. If the company can earn a profit xi with probability pi (the probability depends on the state of economy), then the expected profit of the company is $$\sum_1XiPi$$

Question 69

# The maximum that the company can afford to pay its brand ambassador is

Solution

Expected profit when brand ambassador is used = (3.5 - 3.45)[100000 × 0.3 + 80000 × 0.4 + 50000 × 0.3] lakh = 0.05lakh*77000= 3850 lakh

Expected profit when brand ambassador is not used =  (3.5 - 3.45)[80000 × 0.3 + 50000 × 0.4 + 30000 × 0.3] lakh =0.05lakh*53000= 2650 lakh

Difference = (3850 - 2650) = 1200 lakh = 12 crore.

This is the maximum amount of money that the company can afford to pay its brand ambassador.

Hence, option D is the correct answer.