Question

State of Nature Alternatives A B C Alternative 1 100 120 180 Alternative 2 200 100 50 Alternative 3 120 140 120 Do Nothing 0 0 0

The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value of perfect information (EVPI)?

Answer 1

expected value of alt 1 =(100*0.3+120*0.5+180*0.2)=126

expected value of alt 2 =(200*0.3+100*0.5+50*0.2)=120

expected value of alt 3 =(120*0.3+140*0.5+120*0.2)=130

therefore expected value without information =max(126,120,130) =130

expected value with perfect information =200*0.3+140*0.5+180*0.2=166

therefore expected value of perfect information (EVPI) =166-130 =36