The following payoff table shows profit for a decision analysis problem with two

Question

The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature: The probabilities for the states of nature are P(s_1) = 0.5, P(s_2) = 0.3, and P(s_3) = 0.2. (a) What is the optimal decision strategy if perfect information were available? (b) What is the expected value for the decision strategy developed in part (a)? If required, (c) Using the expected value approach, what is the recommended decision without perfect information? What is its expected value? If required, (d) What is the expected value of perfect information? If required,

Explanation / Answer

From the above table

Answer(a): From the above table, Maximum EMV value is 180, corresponding decision alternative is d2. Hence, the optimum decision strategy is d2.

Answer(b): Expected value = 180.0

Answer(C): Without perfect information means the maxium value from EMV, so

Recommended decision is d2

Answer(d):

Expected value perfect Information= EVWPI-EVWOPI =185-180 = 5

EVPI = 5

Decision S1 S2 S3 EMV d1 200 150 75 (0.5*200)+(0.3*150)+(0.2*75)=160 d2 250 150 50 (0.5*250)+(0.3*150)+(0.2*50)=180

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