Question

Question 1 1 pts Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has prepared a payoff table to help analyze the situation Alves Fawr Market Market Good Market TODO 200 000 Ol Open 2 Do Nothing 000 200.000 Nick belleves there is a 40 percent chance that the market will be good a 30 percent chance that it will be fair, and a 30 percent chance that it will be poor. A market research firm will analyze market conditions and will provide a perfect forecast (they provide a money back rantee) What is the most that should be paid for this forecast? $ 44000 551000 $175.000 5132.000

Answer 1

Q1)

Answer: To answer the first question we will use the concept of Expected value of perfect information (EVPI)

EVPI = EVwPI - EVwoPI

where EVwPI is Expected Value with Perfect Information

and EVwoPI is the Expected Value without perfection information

	State of Nature
Alternatives	Good Market	Fair Market	Poor Market
Open 1	3,80,000	70,000	-4,00,000
Open 2	2,00,000	80,000	-2,00,000
Do nothing	0	0	0
Probability	40%	30%	30%

EMV ( Expected Monetary Value) of Open1 = 0.4 * 3,80,000 + 0.3 * 70,000 + 0.3 * (-4,00,000) = 53,000

EMV of Open2 = 0.4 * 2,00,000 + 0.3 * 80,000 + 0.3 * (-2,00,000) = 44,000

EMV of Do nothing = 0.4 * 0 + 0.3 * 0 + 0.3 * 0 = 0

Now, EVwoPI = the option with the maximum EMV which is of open1

Hence EVwoPI = 53,000

To find EVwPI we choose the best state for each state of nature and multiply it with the probability -

EVwPI = 0.4 * 3,80,000 + 0.4 * 2,00,000 + 0.3 * 80,000 + 0.3 * 0 = 1,76,000

EVPI = 1,76,000 - 53,000 = 1,23,000

Q2)

Answer: TRUE