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Optimal Decision and Expected Value of Perfect Information

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Problem 4
In the following profit payoff table for a decision problem with two states of nature and three decision alternatives, the probabilities for s1 and s2 are: p(s1)=0.8 and p (s2)= 0.2

S=State of Nature
D=Decision alternatives
S1 S2
d1 15 10
d2 10 12
d3 8 20

a. What is the optimal decision?
b. Find the EVPI (expected value of perfect information)

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Problem 4
In the following profit payoff table for a decision problem with two states of nature and three decision alternatives, the probabilities for s1 and s2 are: p(s1)=0.8 and ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the optimal decision and calculate the EVPI.

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Probability Model; Decision Maker is Risk Neutral; Test Results

See attached file.

A decision maker is faced with the problem shown. Assume that the decision maker is risk neutral.

a) A test is available that will provide information about the possible outcomes associated with A. Add a branch called 'do the test' to the decisions below. Show how the test can be used to guide the selection of A or B. Previous evaluations of the test's performance indicate that when the outcome was 'good' the test indicated 'good' 90% of the time. Given that the outcome was 'bad', the test predicted 'bad' 40% of the time. What is the value of the information in the test? What is the optimal strategy for the decision maker to follow?

b) Suppose the test results in the past show that the test predicted 'good' 50% of the time when the outcome was 'good' and predicted 'bad' 50% of the time when the outcome was 'bad'. What is now the value of the information in the test? Why? What is the optimal strategy when this test is used?

c) What is the value of perfect information about outcome A?

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