Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-The minimum EOL in a decision problem will always
A) exceed the EVPI.
B) be less than the EVPI.
C) equal the EVPI.
D) equal the EMV.

Question

Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.  
-The minimum EOL in a decision problem will always
A) exceed the EVPI. 
B) be less than the EVPI. 
C) equal the EVPI. 
D) equal the EMV.

Quizplus · Accepted Answer

The minimum EOL in a decision problem will always equal the EVPI because the EVPI is the expected value of perfect information, which is the maximum amount that a decision-maker would be willing to pay for perfect information about the true state of nature. The minimum EOL is the expected opportunity loss of making a decision without perfect information, which is the maximum amount that a decision-maker could lose by making a decision without perfect information. Therefore, the minimum EOL will always equal the EVPI.

Exhibit 14.8 The Following Questions Use the Information Below