The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: $$\begin{array} { | l | l | l | l | }
\hline { \text { Type } } & { \text { POPULATION TREND } } \
\hline & \text { Declining } & \text { Stable } & \text { Growing } \
\hline \text { Single Family } & 200 & 90 & 70 \
\hline \text { Apartments } & 70 & 170 & 90 \
\hline \text { Condos } & - 20 & 100 & 220 \
\hline
\end{array}$$ If he feels the chances of declining, stable, and growing population trends are 40 percent, 50 percent, and 10 percent, respectively, what is his expected value of perfect information?
A) $187,000
B) $132,000
C) $123,000
D) $65,000
E) $55,000

Question

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: $$\begin{array} { | l | l | l | l | } 
\hline   { \text { Type } } &  { \text { POPULATION TREND } } \
\hline & \text { Declining } & \text { Stable } & \text { Growing } \
 \hline \text { Single Family } & 200 & 90 & 70 \
\hline \text { Apartments } & 70 & 170 & 90 \
\hline \text { Condos } & - 20 & 100 & 220 \
\hline
\end{array}$$ If he feels the chances of declining, stable, and growing population trends are 40 percent, 50 percent, and 10 percent, respectively, what is his expected value of perfect information?
A) $187,000
B) $132,000
C) $123,000
D) $65,000
E) $55,000

Quizplus · Accepted Answer

The expected value of perfect information (EVPI) is calculated by finding the difference between the expected value with perfect information and the expected value without perfect information. The expected value without perfect information is calculated by multiplying each profit by its probability and summing them for each type of construction. The maximum expected value without perfect information is $123,000 (for Single Family). The expected value with perfect information is the sum of the maximum profits for each population trend multiplied by their probabilities: (200*0.4) + (170*0.5) + (220*0.1) = $178,000. Therefore, EVPI = $178,000 - $123,000 = $55,000.

The Construction Manager for Acme Construction, Inc If He Feels the Chances of Declining, Stable, and Growing