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Expected Value of Perfect Information

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A business owner is trying to decide whether to buy, rent, or lease office space and has constructed the following payoff table based on whether business is brisk or slow.
Alternative Brisk Slow
Buy 90 -10
Rent 70 40
Lease 60 55

If the probability of brisk business is .40 and for slow business is .60, determine the expected value of perfect information is:

a) 12
b) 55
c) 57
d) 69

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A business owner is trying to decide whether to buy, rent, or lease office space and has constructed the following payoff table based on whether business is brisk or slow. ...

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The solution calculates expected value of perfect information.

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Expected value of perfect information

The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code.

low medium high
# of workers compliance compliance compliance
1 50 50 50
2 100 60 20
3 150 70 -10

If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50%, respectively, what is his expected value of perfect information?

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