# B evpi evwith perfect information maximum ev without

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b. EVPI = EV(with perfect information) (Maximum EV without P, I) = [0.5(80,000) + 0.5(23,000)] 30,000 = 51,500 30,000 = 21,500 Thus, the most that should be paid is \$21,500. 3-21. The opportunity loss table is Alternative Good Economy Poor Economy Stock Market 0 43,000 Bonds 50,000 3,000 CDs 57,000 0 EOL(Stock Market) = 0.5(0) + 0.5(43,000) = 21,500* This minimizes EOL. EOL(Bonds) = 0.5(50,000) + 0.5(3,000) = 26,500 EOL(CDs) = 0.5(57,000) + 0.5(0) = 28,500 3-22. a. Alternative Good Fair Poor EMV Stock Market 1,400 800 0 880 Bank Deposit-CD 900 900 900 900 Probabilities 0.40 0.40 0 b. Best Decision: deposit \$ 10,000 in Bank CD 3-23. a. Expected value with perfect information is 1,400(0.4) + 900(0.4) + 900(0.2) = 1,100; the maximum EMV without the information is 900. Therefore, Allen should pay at most EVPI = 1,100 900 = \$200. b. Yes, Allen should pay [1,100(0.4) + 900(0.4) + 900(0.2)] 900 = \$80. 3-24 . a. Opportunity Loss Table Strong Market Fair Market Poor Market Max Regret Large 0 19,000 310,000 310,000 Medium 250,000 0 100,000 250,000 Small 350,000 29,000 32,000 350,000 None 550,000 129,000 0 550,000 b. Minimax Regret decision to build medium
3-25. a. Stock (case) Demand (case) 11 Demand (case) 12 Demand (case) 13 EMV 11 385 385 385 385 12 329 420 420 379.05 13 273 364 455 341.25 Probabilities 0.45 0.35 0.20 b . Stock 11 case c. If no loss is involved in excess stock, the recommended course of action is to stock 13 cases and to replenish stock to this level each week. This follows from the following decision table. Stock (case) Demand (case) 11 Demand (case) 12 Demand (case) 13 EMV 11 385 385 385 385 12 385 420 420 404.25 13 385 420 455 411.25 3-26 Manufacture (case) Demand (Case) 6 Demand (Case) 7 Demand (Case) 8 Demand (Case) 9 EMV 6 300 300 300 300 300 7 255 350 350 350 340.5 8 210 305 400 400 352.5 9 165 260