A) COnstruct an excel sheet to compute the expected value (costs) to determine w

Question

A) COnstruct an excel sheet to compute the expected value (costs) to determine whether or not Katherine should purchase insurance.

B) What is the expected value with perfect information?

C) What is the expected value without perfect information?

D) Given B and C, was is the EVPI?

E) To improve the process of decision making, additional information is supplied, as to the conditional probabilities of an or no accident given that Sam buys insurance. Calculate by spreadsheet the revised probabilities of ACCIDENT and NO ACCIDENT

F) Given the revised probability, determine the expected value of sample information

G) If the fee for additional information is $4,000, should you buy the additional information?

No Accident (.80) Accident (.20) Purchase Insurance $700 $700 Don't Purchase Insurance $0 $40,000

Explanation / Answer

I will answer the first 4 parts of this question. Please ask the rest questions seperately.

A.

Expected cost when the insurance is purchased = $700*0.80 + $700*0.20 = $700

Expected cost when the insurance is not purchased = $0*0.80 + $40,000*0.20 = $8,000

Since the expected cost is lower in case when the insurance is purchased , Katherine should purchase insurance.

B.

Expected value with perfect information = $700

C.

Expected Value without perfect information = 0.80*$0 + 0.20*$700 = $140

D.

Expected Value for Perfect Information = $140 - $700 = -$560

Please find the link on which the original excel file in which the work has been done below.

https://www.dropbox.com/s/6a889wk0p5kad8s/insurance.xlsx?dl=0

No Accident Accident Expected Return Purchase Insurance $700 $700 $700 Don't Purchase Insurance $0 $40,000 $8,000 Probability 0.8 0.2 Best Decision $0 $700

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