A city is considering replacing its fleet of gas-powered cars with electric cars

Question

A city is considering replacing its fleet of gas-powered cars with electric cars. If the replacement is successful, the city will experience savings of $1.5m. If the replacement plan fails, the cost to the city will be $675,000. A third possibility is that less serious problems occur and the city will just breakeven ($0). The city estimates these three outcomes have probabilities of 0.3, 0.3, and 0.4.

a. Suppose the city could get perfect information regarding the outcomes of the replacement, what is the most it should pay for this information?

Explanation / Answer

expected value of outcomes . = probablity of outcome * payoff of outcome

= 0.3* 1500000 + 0.3 * 675000 + 0.4 * 0

= 652500

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