TABLE 19-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature
-Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100,200,or 400 dozen roses.Given 0.2,0.4,and 0.6 are the probabilities for the sale of 100,200,or 400 dozen roses,respectively,then the EVPI for buying roses is

Question

TABLE 19-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature  
-Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100,200,or 400 dozen roses.Given 0.2,0.4,and 0.6 are the probabilities for the sale of 100,200,or 400 dozen roses,respectively,then the EVPI for buying roses is

Quizplus · Accepted Answer

The EVPI is the expected value of perfect information minus the expected value without perfect information. The expected value without perfect information is the weighted average of the expected values for each possible number of roses purchased:EV(without perfect information) = (0.2 * EV(100 dozen)) + (0.4 * EV(200 dozen)) + (0.6 * EV(400 dozen))= (0.2 * $1000) + (0.4 * $2000) + (0.6 * $4000)= $2800The expected value of perfect information is the maximum of the expected values for each possible number of roses purchased:EV(perfect information) = max(EV(100 dozen), EV(200 dozen), EV(400 dozen))= $4000Therefore, the EVPI is:EVPI = EV(perfect information) - EV(without perfect information)= $4000 - $2800= $1200

TABLE 19-1 The Following Payoff Table Shows Profits Associated with a Set