Compute the expected value of perfect information

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Reference no: EM131279250

A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm’s capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P (low) = .20 and P (high) = .80. NEXT YEAR'S DEMAND Alternative Low High Do nothing $45* $64 Expand 21 85 Subcontract 37 70 * Profit in $ thousands. a-1. Determine the expected profit of each alternative. (Enter your answers in thousands. Round your answers to 2 decimal places. Omit the "$" sign in your response.) Expected Profit Do Nothing $ thousands Expand $ thousands Subcontract $ thousands a-2. Which alternative is best? Do nothing Expand Subcontract c. Compute the expected value of perfect information. (Enter your answer in thousands. Round your answer to 2 decimal places. Omit the "$" sign in your response.) EVPI $ thousands

Reference no: EM131279250

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