XAT 2014 — Decision Making Question 10
Read the following case – let and answer the questions 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.
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 decides to test market it?
Answer & solution
- A
0.21
0.35
- C
0.14
- D
0.28
- E
Cannot be computed
Probability of product failure if the test marketing results were favourable = (0.7)(0.2) = 0.14
Probability of product failure if the test marketing results were unfavorable = (0.3)(0.7) = 0.21
Probability of product failure if it was test marketed
= 0.14 + 0.21 = 0.35
Hence, option (b).