The following is a payoff table giving profits for various situations STATES OF
ID: 3433110 • Letter: T
Question
The following is a payoff table giving profits for various situations
STATES OF NATURE
DEMAND
ALTERNATIVES LOW MEDIUM HIGH
Alternative 1 80 120 140
Alternative 2 90 90 90
Alternative 3 50 70 150
The probabilities for states of nature Low, Medium, and High are 0.25, 0.55, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value of perfect information (EVPI)?
Explanation / Answer
Let us prepare table with frequency * probability
For example alternative 1 80 becomes 80(0.25) = 20
Hence expected value = total of all these = 55+154+76
= 285.
Low Medium High AltI 20 66 28 AltII 22.5 49.5 18 Altiii 12.5 38.5 30Related Questions
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