A plant manager wants to know how much he should be willing to pay for perfect m

Question

A plant manager wants to know how much he should be willing to pay for perfect market research. Currently there are two states of nature facing his decision to expand or do nothing. Under favorable market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant. Under unfavorable market conditions the large plant would lose $50,000 and the small plant would make $0. If the two states of nature are equally likely, how much should he pay for perfect information?

Explanation / Answer

Expected value of perfect information:

100,000*0.5 + 0*0.5 = 50,000

= 25,000

EVPI = 25,000

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