Deborah Hollwager, a concessionaire for the Amway Center in Orlando, has developed a table of conditional...

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Deborah Hollwager, a concessionaire for the Amway Center in Orlando, has developed a table of conditional values for the vari

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Answer 1

Answer #1

a.

EMV for an alternative = Payoffof StateOf Nature * ProbabilityOfThat State of Nature

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 = Best Payoffof Each StateOf Nature* ProbabilityOfThatStateOf Nature

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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Answer 2

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