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aivan3 [116]
3 years ago
5

A plant manager wants to know how much he should be willing to pay for perfect market research. Currently there are two states o

f nature facing his decision to expand or do nothing. Under favorable market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant. Under unfavorable market conditions the large plant would lose $50,000 and the small plant would make $0. If the two states of nature are equally likely, how much should he pay for perfect information?
Business
1 answer:
Tema [17]3 years ago
3 0

Answer:

$25,000

Explanation:

                                  <u>Decision pay off matrix</u>

<u></u>

Plant      Favourable market    Unfavourable market     equally likely

Large            100,000                       (50,000)                         25,000

Small             5000                                0                                  2500  

EVPI =?

EVPI = EVwPI - EVwoPI

EVPI = 50,000 - 25,000

EVPI = $25000

<u>Workings</u>

EVPI = Expected value of Perfect Information

EVwPI = Expected value with Perfect Information

EVwoPI = Expected value without Perfect Information

EVwPI = (100,000+0)/2

EVwPI = 50,000

EVwoPI = 25,000 equally likely

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