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econ111_lecture4B - Econ 111 Microeconomics Spring 2009...

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1 Econ 111 Microeconomics Spring 2009 Lecture 4 2 nd Half (Chapter 5: Choice Under Uncertainty (2)) Heiwai Tang
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2 Value of Information Consider the expected utility under complete information and that under incomplete information. The comparison reveals the value of information ( V info ). Value of information: U(Payoffs Under Complete Information - V info ) = U(Choice Without Complete Information)
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3 Value of Information (cont’) A store manager must determine how many suits to order. (The question is the similar to the one in the text) Buying 100 suits cost $180/suit Buying 50 suits cost $200/suit Selling a suit earns $300/suit Unsold suits can be returned for half cost (i.e., $90 or $100). The probability of selling each quantity is 1/2. The manager’s utility function is u = M 1/2 Demand is uncertain.
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4 No info Buy info Order 50 Order 100 Order 50 Order 100 Sell 50 Sell 50 or 100 (½ vs. ½) Sell 50 Sell 100 (Pr = ½ for each outcome)
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5 Without Information If you order 50 suits, you can always sell them. Profit = 300 × 50 - 200 × 50 = 5000. EU= 5000 1/2 = 70.7 If you order 100 suits, you pay 180 × 100 = 18,000
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