Compute the expected value of perfect information

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Reference no: EM131360268

Problem -

Andrew Thomas, a sandwich vendor at Hard Rock Cafe's annual Rockfest, created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd):

Alternatives

States of Natures (Demand)

Big

Average

Small

Large stock

$22,000

$12,000

-$2,000

Average stock

$14,000

$10,000

$6,000

Small stock

$ 9,000

$ 8,000

$4,000

The probabilities associated with the states of nature are 0.3 for a big demand, 0.5 for an average demand, and 0.2 for a small demand.

a) Determine the alternative that provides Andrew the greatest expected monetary value (EMV).

b) Compute the expected value of perfect information (EVPI).

Reference no: EM131360268

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