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Forecasting Different Alternatives

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The following is a payoff table giving profits for various situations:

States of Nature
Alternatives A B C
Alternative 1 120 140 120
Alternative 2 200 100 50
Alternative 3 100 120 180
Do Nothing 0 0 0

Using the above table and given the probabilities for the States A, B, and C are
0.3, 0.5, and 0.2 respectively; if a perfect forecast of the future were available, what would be the expected profits?

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Solution Summary

Detailed description of finding the expected profit of the alternatives.

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In order to solve this question first of all we need to calculate the expected values without perfect information. We are going to use the "Expected Value Criterion" in order to solve this question. This method is used to identify the best decision alternative. The expected value EV is calculated by multiplying the each alternative outcome (payoff value) for each state of ...

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Umut Oltulu, MBA
Education
  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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