Question

a. Why does one calculate the Value of Perfect Information before calculating the Value of Imperfect Information?

b. Suppose a consultant with an excellent track record offers to provide you advice on an acquisition that could provide you a profit of $10 M. They will charge you $20,000 for the advice. You determine that the Value of Perfect Information is $19,000. Should you pay the consultant for their advice? Why or why not?

Answer 1

a)

We begin by determining the value of perfect information. Perfect information removes all uncertainty about the outcomes for the decision alternatives. While there is rarely an option in real-world business decisions that would actually remove all uncertainty, the value of perfect information provides an easily calculated benchmark about the worth of collecting additional information. If all the available options for collecting information cost more than the value of perfect information, then these options do not need to be analyzed in further detail. This is because imperfect information cannot be worth more than perfect information.

No source of information can be worth more than the value of perfect information.

b)

as value of perfeect information is 19000 ; that is without using their advice your expected profit will be 19000 less; while consultant charging more than that ; one must not pay the  consultant for their advice

Thank you for asking. Please give thumbs up to my answer...!!