If he feels the chances of low, normal, and high precipitation are 30%, 20%, and 50% respectively, what is his expected value of perfect information?
A)$140,000
B)$170,000
C)$285,000
D)$305,000
E)$475,000

Question

Quizplus · Accepted Answer

The expected value of perfect information is the difference between the expected value with perfect information and the expected value without perfect information. The expected value with perfect information is the sum of the products of the probabilities of each outcome and the payoffs for that outcome. The expected value without perfect information is the sum of the probabilities of each outcome and the expected payoffs for that outcome. In this case, the expected value with perfect information is 0.3 * 100,000 + 0.2 * 150,000 + 0.5 * 200,000 = 170,000. The expected value without perfect information is 0.3 * 50,000 + 0.2 * 75,000 + 0.5 * 100,000 = 85,000. Therefore, the expected value of perfect information is 170,000 - 85,000 = 85,000.

If He Feels the Chances of Low, Normal, and High