The following payoff table provides profits based on various possible decision a
ID: 2792007 • Letter: T
Question
The following payoff table provides profits based on various possible decision alternatives and various levels of demand at Robert Klassan's print shop: DEMAND LOW $10,000 5,000 HIGH $30,000 $40,000 $50,000 Alternative 1 Alternative 2 Alternative 3- 2,000 The probability of low demand is 0.4, whereas the probability of high demand is 0.6. a) What is the highest possible expected monetary value? b) What is the expected value with perfect information (EVwPI)? c) Calculate the expected value of perfect information for this situation?Explanation / Answer
a.) Expected Monetary Value in Alternative-1 = 0.40x10000 + 0.60x30000 = 4000 + 18000 =22000
Expected Monetary Value in Alternative-2 = 0.40x5000 + 0.60x40000 = 2000 + 24000 =26000
Expected Monetary Value in Alternative-3 = 0.40x-2000 + 0.60x50000 = -800 + 30000 =29200
Highest Possible monetary value is in Alternative-3 i.e. 29,200
b.) Expected Value with Perfect Information = 0.40xMax(10000,5000,-2000) + 0.60xMax(30000,40000,50000)
= 0.40x10000 + 0.60x50000
= 4000 + 30000
= 34000
c.) Expected Value of Perfect Information =34000 - 29200 = 4800
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