ABC Company, a soft-drink vendor, has created a table of payoffs for three stock
ID: 402771 • Letter: A
Question
ABC Company, a soft-drink vendor, has created a table of payoffs for three stocking decisions for three different states of nature:
States of nature (Demand)
Alternatives
Heavy
Medium
Low
$2,060
$1,510
$1,200
$1,390
$1,430
$1,290
$1,560
$1,550
$1,890
Probabilities associated with the states of nature are 0.4 for heavy demand, 0.2 for medium demand, and 0.4 for low demand. What is the expected value with perfect information? Specify only the amount. e.g. 14000
States of nature (Demand)
Alternatives
Heavy
Medium
Low
Large stock$2,060
$1,510
$1,200
Average stock$1,390
$1,430
$1,290
Small stock$1,560
$1,550
$1,890
Explanation / Answer
Best outcome :- 2060*0.4+ 1550*0.2 +1890*0.4 = 1890
Feom each set :-
1) 2060*0.4 + 1510* 0.2 + 1200*0.4 = 1606
2) 1390*0.4 + 1430*0.2 + 1290*0.4 =1358
3) 1560*0.4 + 1550*0.2 +1890*0.4 = 1690
Expected value of perfect information = 1890-1690