Question

Decision Making

Part A

A tire manufacturer has three different models that it sells. The anticipated payoff is dependent on the type sold and the level of demand.

	Scenarios
Alternatives	Low demand	Medium demand	High demand
All season	$230,780	$365,000	$170,000
All terrain	$219,685	$425,000	$400,000
Winter	$-240,693	$238,000	$790,000
Probability	0.35	0.40	0.25

What is the EMV for the all season tires?

(Round to a whole number)

Part B  (***NEW NUMBERS from previous question***)

A tire manufacturer has three different models that it sells. The anticipated payoff is dependent on the type sold and the level of demand.

	Scenarios
Alternatives	Low demand	Medium demand	High demand
All season	$232,838	$365,000	$170,000
All terrain	$264,175	$425,000	$400,000
Winter	$-123,939	$238,000	$790,000
Probability	0.35	0.40	0.25

What is the EMV for the all terrain tires?

(Round to a whole number)

Part C (***NEW NUMBERS from previous question***)

A tire manufacturer has three different models that it sells. The anticipated payoff is dependent on the type sold and the level of demand.

	Scenarios
Alternatives	Low demand	Medium demand	High demand
All season	$225,659	$365,000	$170,000
All terrain	$265,706	$425,000	$400,000
Winter	$-148,410	$238,000	$790,000
Probability	0.35	0.40	0.25

What is the EMV for the winter tires?

(Round to a whole number)

Part D  (***NEW NUMBERS from previous question***)

A tire manufacturer has three different models that it sells. The anticipated payoff is dependent on the type sold and the level of demand.

	Scenarios
Alternatives	Low demand	Medium demand	High demand
All season	$211,585	$365,000	$170,000
All terrain	$269,040	$425,000	$400,000
Winter	$-196,103	$238,000	$790,000
Probability	0.35	0.40	0.25

What is the Expected Value with Perfect Information (EVwPI)

(Round to a whole number)

Part E

What is the Expected Value of Perfect Information (EVPI) if the Maximum EMV is 4,186 and the Expected Value with Perfect Information (EVwPI) is 7,395?

(Round to a whole number)

Part F

What does the Expected Value of Perfect Information (EVPI) represent?

(Choose the best answer)

		The most I'd be willing to pay for perfect information.
		The least I'd be willing to pay for perfect information.
		The cost or price of perfect information if you were to purchase it.
		The maximum expected monetary value.

Answer 1

Part A

Formula

Part B

EMV for all terrain tires = 264175*0.35+425000*0.4+400000*0.25 = 362461.25 = 362461 (Rounded to nearest whole number)

Part C

EMV for the winter tires = (-148410)*0.35+238000*0.4+790000*0.25 = 240756.5 = 240757 (Rounded to nearest whole number)

Part D

Expected value with perfect information = 0.35*269040+0.4*425000+0.25*790000 = 461664

part E

EVPI = Expected Value with Perfect Information-maximum EMV = 7395-4186 = 3209

part F

Correct answer is The most I'd be willing to pay for perfect information.