Using the payoff matrix below answer the questions that follow: Market Probabili

Question

Using the payoff matrix below answer the questions that follow: Market Probabilities Market receptive Market mildly receptive Market unfavorable Alternatives Plan a Plan b Plan c Probability: 0.55 $20,000 $25,000 $18,000 Probability:x.xx $15,000 $12,000 $9,000 Probability: 0.30 $6,000 $3,000 $7,000 1. What is the appropriate probability value for the 'market mildly receptive' state of nature (denoted by x.xx) (5 points)? 2. Which Plan do you recommend adopting, using the expected value criterion? (20 points) 3. Which plan do you recommend adopting, using the EOL criterion? (25 points) 4. BONUS QUESTION (5+5-10 points): What is the expected return or yield with perfect information in this case, and what is the related value of the EVPI? Show all necessary steps for calculating EVPI and verify that EVPI EOL

Explanation / Answer

1. Appropriate probability value for market mildly receptive = 1 - 0.55 - 0.30 = 0.15

2. Expected value for plan a = 0.55 * 20000 + 0.15 * 15000 + 0.30 * 6000 = $ 15,050

Expected value for plan b = 0.55 * 25000 + 0.15 * 12000 + 0.30 * 3000 = $ 16,450

Expected value for plan c = 0.55 * 18000 + 0.15 * 9000 + 0.30 * 7000 = $ 13,350

so we will suggest to adopt plan b .

(3) We will first make an opportunity loss table.

Here OL is the value which will occur when we suggest the wrong option in any certain condition. Here best optiion is in bold

SO now Opportunity loss table. We will get OLs by substracting the payoffs from the maximum payoffs.

Now we will Calculate the expected opportunity loss for each pla.

For plan A : 5000 * 0.55 + 0 * 0.15 + 1000 * 0.30 = $ 3050

for plan B : 0 * 0,.55 + 3000 * 0.15 + 4000 * 0.30 = $ 1650

For plan C: 0.55 * 7000 + 0.15 * 6000 + 0.30 * 0 = $ 4750

Here minimum opportunity loss is for Plan B so we will choose plan B.

Question 4

here we know that best return will be get in the these conditions.

Market Receptive - plan b

Market Mildly receptive - plan a

Market unfavorable - plan c

so Perfect information expected return = 0.55 * 25000 + 0.15 * 15000 + 0.30 * 7000 = $ 18100

EVPI = $ 18100 - $ 16450 = $ 1650

here EVPI = EOL

Receptive Mildly Receptive Unfavorable Alternative Plan A 20000 15000 6000 Plan B 25000 12000 3000 Plan C 18000 9000 7000

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