With perfect information probability 100000 0 0 0 0

This preview shows page 3 - 7 out of 10 pages.

With perfect information Probability 100,000 0 100,000 0.5 40,000 0 0 0.5 We have: EMV(construct clinic)= (0.5)*($100,000) + (0.5)*($40,000) = $30,000 EMV(do nothing)= (0.5)*($0) + (0.5)*($0) = $0 Best alternative for favorable and unfavorable market is constructing the clinic with a payoff of $100,000 and not construct the clinic with a payoff of $0, respectively. We have: EV(with perfect information)= (0.5)*($100,000) + (0.5)*($0) = $50,000 EVPI = EV(with perfect information)Maximum EMV(without perfect information)= $50,000 $30,000 = $20,000 Efficiency of sample information = EVSIEVPI×100%= $11,140$20,000×100%= 55.7% Thus, the market survey is only 55.7% as efficient as perfect information.
LE ANH KHOA BABAIU14124 336: Jerry Smith is thinking about opening a bicycle shop in his hometown. Jerry loves to take his own bike on 50mile trips with his friends, but he believes that any small business should be started only if there is a good chance of making a profit. Jerry can open a small shop, a large shop, or no shop at all. The profits will depend on the size of the shop and whether the market is favorable or unfavorable for his products. Because there will be a 5year lease on the building that Jerry is thinking about using, he wants to make sure that he makes the correct decision. Jerry is also thinking about hiring his old marketing professor to conduct a marketing research study. If the study is conducted, the study could be favorable (i.e., predicting a favorable market) or unfavorable (i.e., predicting an unfavorable market). Develop a decision tree for Jerry.
LE ANH KHOA BABAIU14124 341: A financial advisor has recommended two possible mutual funds for investment: Fund A and Fund B. The return that will be achieved by each of these depends on whether the economy is good, fair, or poor. A payoff table has been constructed to illustrate this situation: (a) Draw the decision tree to represent this situation. (b) Perform the necessary calculations to determine which of the two mutual funds is better. Which one should you choose to maximize the expected value? (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 EMVs would be the same)? INVESTMENT STATE OF NATURE GOOD ECONOMY FAIR ECONOMY POOR ECONOMY Fund A Fund B Probability $10,000 $6,000 0.2 $2,000 $4,000 0.3 $5,000 0 0.5 Solution:
LE ANH KHOA BABAIU14124

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture