1. The highest value for the equally likely criterions is ________; this occurs
ID: 2751434 • Letter: 1
Question
1. The highest value for the equally likely criterions is ________; this occurs with alternative ______. (1.5 pts)
States of Nature
Alternatives
Option 1
S1
$10,000
S2
$30,000
Option 2
$5,000
$45,000
Option 3
$-4,000
$60,000
States of Nature
Alternatives
S1
S2
p
0.6
0.4
Option 1
200
300
Option 2
50
350
2. What is the EMV for Option 1 in the following decision table?
3. What is the EMV for Option 2 in the following decision table?
4. What is the expected value under certainty in the following decision table? (EVwPI)
5. What is the expected value of perfect information? (EVPI)
Alternatives
Option 1
S1
$10,000
S2
$30,000
Option 2
$5,000
$45,000
Option 3
$-4,000
$60,000
Explanation / Answer
1. The highest value for the equally likely criterions is calculated as under:
Option 3 = (-4000x0.50) + (60000x0.50)
= $28000
This occurs with alternative 'Option 3'.
2. EMV for Option 1 = (10000x0.60) + (30000x0.40)
= $18000
3. EMV for Option 2 = (5000x0.60) + (45000x0.40)
= $21000
4. Expected Value under certainty for Option 1 is $10000
Expected Value under certainty for Option 2 is $60000
5. EVPI = EPC – max(EMV)
The best payoff under each state of nature is $10000 and $60000
The probabilities of these states are 0.6 and 0.4
EPC = (10000x0.6) + (60000x0.4) = $30000
Largest expected payoff without perfect information is:
max(EMV) = $10000
EVPI = EPC – max(EMV)
= 30000 - 10000
= $20000
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