Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100; otherwise it is worth $0.There is 50% chance that any variety will be retired.What is the value to Sarah of knowing ahead of time whether a variety will be retired?
A) $50
B) $5
C) $2.50
D) $0

Question

Quizplus · Accepted Answer

The value of knowing ahead of time is calculated as the difference between the expected value with and without the information. Without the information, the expected value of a stuffed animal is 0.5 * $100 + 0.5 * $0 = $50. With the information, the value is either $100 (if retired) or $0 (if not), but since she would only buy the retired ones, her expected value is $100. The value of the information is $100 - $50 = $50. However, since she pays $5 for each stuffed animal, the net value to Sarah of knowing ahead of time is $50 - $5 = $45. This option is not listed, indicating a misunderstanding in the explanation process. The correct interpretation should focus on the expected gain from the decision to buy or not buy based on the information, which is the increase in expected value due to having the information. Given the options, the closest correct approach to understanding the value of the information is by considering how it affects the decision-making process in terms of expected outcomes, which seems to have been misinterpreted in the initial explanation.

Sarah Buys Little Stuffed Animals for $5 Each