If she feels the chances of low, medium, and high compliance are 20%, 30%, and 50% respectively, what is her expected value of perfect information?
A)$16,000
B)$26,000
C)$46,000
D)$48,000
E)$50,000

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 each outcome. The expected value without perfect information is the sum of the probabilities of each outcome and the payoffs for each outcome, weighted by the probabilities of each outcome.In this case, the expected value with perfect information is:(0.20 * $50,000) + (0.30 * $25,000) + (0.50 * $10,000) = $26,000The expected value without perfect information is:(0.20 * $25,000) + (0.30 * $25,000) + (0.50 * $25,000) = $25,000Therefore, the expected value of perfect information is:$26,000 - $25,000 = $1,000

If She Feels the Chances of Low, Medium, and High