Suppose there is a firm that has several divisions. One of the divisions is considering introducing a new product to the market. If it does not introduce the product, then the firm’s profitability will not change. If it does introduce the product, there is a 60 percent chance the product will yield a profit of $4 million, and a 40 percent probability the product will yield a loss of $2.5 million to the firm. Assume that market research, correctly executed, could accurately forecast the success or failure of the new product if it were to be introduced. How much should the firm be willing to budget for that market research?

Begin your answer with the dollar amount, then briefly justify your recommendation.

Suppose that another of the firm’s divisions is also considering introducing a new product to the market. The markets of the firm’s divisions are separate, and the introduction of a product by one division has no effect on the other markets of the other divisions. If this division’s product is not introduced the firm’s profitability will not change. If it does introduce the product, there is a 70 percent chance the product will yield a profit of $5 million, and a 30 percent probability the product will yield a profit of $1 million to the firm. Assume that market research, correctly executed, could accurately forecast the success or failure of the new product if it were to be introduced. How much should the firm be willing to budget for that market research?

Begin your answer with the dollar amount, then briefly justify your recommendation