What is the expected value of perfect information of the following decision table? (hint: you probably...
What is the expected value of perfect information of the following decision table? (hint: you probably need to calculate the expected value with perfect information and find the maximum EMVs of each option)
|
States of Nature |
||
|
Alternatives |
S1 |
S2 |
|
Option 1 |
200 |
300 |
|
Option 2 |
50 |
350 |
|
probability |
.6 |
.4 |
Homework Answers
Step - 1: The best outcome for the state of nature “S1" is “Option 1” with a payoff of 200. The best outcome for the state of nature “S2” is “Option 2” with a payoff of $350.
Expected value with perfect information EVwPI= (200)(0.6) +
(350)(0.4) = 260.
Step - 2. We find EMV for each alternative:
Option 1 = 200 * 0.6 + 300 * 0.4 = 240
Option 2 = 50 * 0.6 + 350 * 0.4 = 170
The maximum EMV is $240 for Option 1, which is the expected
outcome without perfect information.
Thus:
EVPI = EVwPI - Maximum EMV
= 260 - 240 = 20
Answer: 20
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