Tutorial 5 - Decision Analysis (Part 2) Original

Choose the best alternative based on the optimal

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: =10,000*8% $800 =10,000*9% $900* Bad Market, (0.2) =10,000*0% $0 =10,000*9% $900* EMV $760 $900* By using the definition, EVPI=Expected Value with perfect information – Expected Value without perfect information - Expected Value with perfect information = 1,100×0.4 + 900×0.4 + 900×0.2 = $980 - Expected Value without perfect information = $900 EVPI= 980 – 900 = $80 Conclusion: The maximum willing to pay for a newsletter is changed to $80. CB2201 Sem B in 2012/2013 – TA1, TA3, TA4, TB5, TC4, TF4, TE3, TE4, TE5, TF1, and TF3 Q3.41 State of Nature Investment Good Economy, 0.2 Fair Economy, 0.3 Poor Economy, 0.5 Fund A $10,000 $2,000 -$5,000 Fund B $6,000 $4,000 0 a) Draw the decision tree to represent this situation. b) Which investment should you choose to maximize the expected value? EMV (Fund A) = 10,000(0.2) + 2,000(0.3) + (-5,000)(0.5) = $100 EMV (Fund B) = 6,000(0.2) + 4,000(0.3) + 0(0.5) = $2,400 Conclusion: The best decision is to invest Fund B with the optimal EMV = $2,400 c) Suppose there is question about the return of Fund A in a good economy. It could be higher or lower than $10,000. What value for this would cause a person to be indifferent between Fund A and Fund B (i.e., the EMV(Fund A) and EMV (Fund B) would be the same)? Let X = Payoff for Fund A in a good economy EMV (Fund A) = EMV (Fund B) X (0.2) + 2,000(0.3) + (-5,000)(0.5) = 2,400 0.2X = 4,300 X = 21,500...
View Full Document

Ask a homework question - tutors are online