What is the expected value with perfect information of the following decision table? States of nature...

What is the expected value with perfect information of the following decision table?

States of nature

Alternative	S₁	S₂
Probability	0.4	0.6
Option 1	10,000	30,000
Option 2	5,000	45,000
Option 3	-4,000	60,000

A) 5,000 B) 10,000 C) 40,000 D) 60,000 E) 70,000

Solutions

Expert Solution

With perfect information, the best outcome of an alternative will be selected.

In S1, option 1 is the highest (at 10,000) and so it will be selected.

In S2, option 3 is the highest (at 60,000) and so it will be selected.

Expected value = probability*value

= (0.4*10,000) + (0.6*60,000)

= 4,000+36,000 = 40,000

Answer is option C.

Amanda K answered 2 years ago

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