Need help with finding EVPI and Expected Profit. A small building contractor has
ID: 461715 • Letter: N
Question
Need help with finding EVPI and Expected Profit.
A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm's capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P (low) = .30 and P (high) = .70. Determine the expected profit of each alternative. (Enter your answers in thousands. Round your answers to 2 decimal places. Omit the "$" sign in your response.) Which alternative is best? Do nothing Expand Subcontract Compute the expected value of perfect information. (Enter your answer in thousands. Round your answer to 2 decimal places. Omit the "$" sign in your response.)Explanation / Answer
1. do nothing, his profit is= 0.3*42+0.7*55= 12.6+38.5= $51.1
expand= 0.3*20+0.7*82= 6+57.4= $63.4
contrast= 0.3*30+0.7*69= 9+48.3= $57.3
2. it is better to expand the business
3. the value of EVPI is $63.4