Refer to the following payoff table Alternative A1 A2 State of Nature S1 75 0 S2

Question

Refer to the following payoff table Alternative A1 A2 State of Nature S1 75 0 S2 -40 100 Prior Probabity 0.60.4 There is an option of paying $100 to have research done to better predict which state of nature will occur. When the /true state of nature is S1, the research will accurately predict si 60% of the time, when the true state of nature is S2, the research will accurately predict S2 80% of the time. Given that the research is not done, what is the expected payoff using Bayes' decision rule? OA. O O B. 29 : ? ?. 40 O D. 75

Explanation / Answer

Expected payoff (A1) = 0.6 * 75 + 0.4 * (-40) = 29

Expected payoff (A2) = 0.6 * 0 + 0.4 * 100 = 40

Thus, A2 needs to be choosen as it has highest value of expected payoff.

Hence, Option (C) 40 is the correct choice.

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