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Problem 18

# Problem 18 - 30,000 10,000 Nimnot 85,000 40,000 Expected...

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Chapter 12 Problem 18 Market Conditions Product Favorable 0.2 Stable 0.7 Unfavorable 0.1 Widget 120,000 70,000 -30,000 Hummer 60,000 40,000 20,000 Nimnot 35,000 30,000 30,000 a. Comput expected value EV(Widget) = 120000*0.2 + 70000*0.7 + -30000*0.1 = 70000 EV(Hummer) = 60000*0.2 + 40000*0.7 + 30000*0.1 = 42000 EV(Nimnot) = 35000*0.2 + 30000*0.7 + 30000*0.1 = 31000 Choose Widget b. Opportunity Loss Table Product Favorable 0.2 Stable 0.7 Unfavorable 0.1 Widget 0 0 60,000 Hummer 60,000
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Unformatted text preview: 30,000 10,000 Nimnot 85,000 40,000 Expected opportunity loss EV(Widget) = 0.1 * 60000 = 6000 EV(Hummer) = 0.2*60000 + 0.7*30000 + 0.1*10000 = 34000 EV(Nimnot) = 85000*0.2 + 0.7*40000 = 45000 c. Determine how much the firm would be willing to pay to gain better information Perfect: 120,000*0.2 + 70000*0.7 + 30000*0.1 = 76000 EV(Widget)= 0.2*120000 +0.7*70000 - 30000*0.1 = 70000 EVPI = 76000 - 70000 = 6000...
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