il aind tuhe expected value of perfect information 25. Fenton and Farrah Friendl
ID: 421554 • Letter: I
Question
il aind tuhe expected value of perfect information 25. Fenton and Farrah Friendly, husband-and-wife car dealers, are soon going to open a new dealer. ship. They have three offers: from a foreign compact car company, from a U.S.-producer of full. sized cars, and from a truck company. The success of each type of dealership will depend on how much gasoline is going to be available during the next few years. The profit from each type of deal- ership, given the availability of gas, is shown in the following payoff table:Explanation / Answer
Expected payoff from compact cars dealership = .6*300000 + .4*150000 = $240000
Expected payoff from Full sized cars dealership = .6*(-100000) + .4*600000 = $180000
Expected payoff from Trucks dealership = .6*120000 + .4*170000 = $140000
Since the expected value of payoff is maximum when there is a compact car dealership that is $240000. So, the couple should purchase compact car dealership.
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