Question

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

Answer 1

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.