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Expected Value of Sample Information

5. Expected Value of Sample Information (16.0 points)
Chapter 12, Problem 36

The machine shop owner is considering hiring a military consultant. By talking to other machine shop owners and obtaining past data, the owner has estimated the military consultant was correctly issued a favorable report where a contract was later award 70% of the time, P(f | c) = 0.70. Also, the military consultant correctly issued an unfavorable report where no contract was awarded 80% of the time, P(u | n) = 0.80. Using decision tree analysis, compute the maximum fee the owner should pay the consultant for his services.

(For this problem, you will need to determine the expected value from problem 15. The answer is the drill press with EV=$11,200, but you are encouraged to confirm this on your own. )

a) $5,280
b) $7,820
c) $16,480
d) $25,200

Answer: _____

Note: Problem 15 below...
15. A machine shop owner is attempting to decide whether to purchase a new drill press, a lathe, or a grinder. The return from each will be determined by whether the company succeeds in getting a government military contract. The profit or loss from each purchase and the probabilities associated with each contract outcome are shown in the following payoff table. Compute the expected value for each purchase and select the best one.

Purchase Contract
.40 No Contract
Drill Press $ 40,000 $ -8,000
Lathe 20,000 4,000
Grinder 12,000 10,000


Solution Summary

Uses decision tree analysis determines the maximum fee the owner should pay the consultant for his services