Calculate the expected value of perfect information

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Reference no: EM13101257

Beverly Mills has decided to lease a hybrid car to save on gasoline expenses and to do her part to help keep the environment clean. The car she selected is available from only one dealer in the local area, but that dealer has several leasing options to accomadate a variety of driving patterns. All the leases are for 3 years and require no money at the time of signing the lease. The first option has a monthly clost of $330, a total mileage allowance of 36,000 miles (an average of 12,000 miles per year), and a cost of $0.35 per mile for any miles over 36,000. The following table summarizes each of the three lease options:

3 year lease Monthly cost Mileage Allowance Cost Per Excess Mile
Option 1 $330 36,000 $0.35
Option 2 $380 45,000 $0.25
Option 3 $430 54,000 $0.15

Beverly has estimated that, during the 3 years of the lease, there is a 40% chance she will drive an average of 12,000 miles per year, a 30% chance she will drive an average of 15,000 miles per year, and a 30% chance that she will drive 18,000 miles per year. In evaluating these lease options, Beverly would like to keep her costs as low as possible.

(a) Develop a payoff (cost) table for this situation.
(b) What decision would Beverly make if she were optomistic?
(c) What decision would Beverly make if she were pessimistic?
(d) What decision would Beverly make if she wanted to minimize her expected cost (monetary value)?
(e) Calculate the expected value of perfect information for this problem.


Reference no: EM13101257

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