Homework Answers
a.
EMV for an alternative =
EMV for Large Inventory= 24,000*0.3+10,000*0.55+ (-3000)*0.15 = 12250
EMV for Average Inventory= 16,000*0.3+15,000*0.55+ 6000*0.15 = 13950
EMV for Small Inventory= 9,000*0.3+6,000*0.55+ 5000*0.15 = 6750
Average Inventory alternative provides Deborah the greatest EMV of $13,950.
b.
THEORY:
Expected value of perfect information (EVPI) is the maximum price that an individual would be willing to pay to get perfect information (PI).
EVPI = Expected value with perfect information- Expected value without perfect information
CALCULATION:
The expected value without perfect information is same as Maximum EMV which was determined to be $13950 for average inventory alternative in part a.
Expected value with perfect
information = 
|
State of Nature |
Best Payoff for that Nature |
Probability of that nature |
|
Large |
24,000 (Maximum of 24000, 12000, 9000) |
0.3 |
|
Average |
15,000 (Maximum of 10000, 15000, 6000) |
0.55 |
|
Small |
6,000 (Maximum of -3000, 6000, 5000) |
0.15 |
Expected value with perfect information = 24,000*0.3 + 15,000*0.55 + 6000*0.15 = 16350
EVPI = 16350 - 13950 = $2400
Therefore, EVPI = $2,400
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