Question

James Jordan of Jordan's Printing in Atlanta must decide to either accept a contract for a government printing job or fly to Seattle to bid on a brochure. Capacity constrains prohibit him from doing both jobs, and he must decide on the government contract before the bidding process starts. He estimates the payoff table in terms of net dollar return as shown below. Do Not get Brochure job Get Brochure job Accept Government Contract $1000 $1000 Bid on the Brochure Job -$1000 $4000 His current estimate of the probability that he gets the brochure job is 0.3. Question 5 (1 point) What is the efficiency of the inside information mentioned in question 2? Round your answer to two decimal places. For example, 0.12 Your Answer: Answer Question 6 (1 point) The inside information that he was able to get for free is no longer available. Instead, he can get inside information from a different source for $350. With this information, the expected payoff should be at least $ Your Answer: 4 Answer Question 7 (1 point) Let P(J) be the probability that he gets the brochure job. What is the smallest value of PU) at which James is indifferent toward both alternatives? Your Answer: Answer Question 2 (1 point) If James were truly a non-drug user, what is the probability that he would receive the positive result? A 0.95 B 0.99 C O.01 D Not given in the question.

Answer 1

Answer:

5)

Efficiency of the inside information = EVSI / EVPI

EVSI = EVwithSI - EVwithoutSI = 1200 - 1000 = $ 200

EVPI = EVwithPI - EVwithoutPI = 1900 - 1000 = $ 900

Efficiency of the inside information = 200/900 = 22.2 %

6)

With this information, the expected payoff should be at least = EVwithoutSI + Cost of SI

= $ 1000+350 = $ 1350

7)

For indifference, P(J)*4000+(1-P(J))*(-1000) = 1000

5000*P(J) = 2000

P(J) = 2/5 = 0.40

Smallest value of P(J) at which James is indifference toward both alternatives = 0.40