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Hi John,
I watched your Risk and uncertainty video and thought I understood it very well but I got stuck answering the below question:
A company can make either of two new products, X and Y, but not both. The profitability of each product depends on the state of the market, as follows.Market state Profit from product Probability of market state
X$ Y$
Good 20,000 17,000 0.2
Fair 15,000 16,000 0.5
Poor 6,000 7,000 0.3What is the expected value of perfect information as to the state of the market?
Many thanks for your help in advance,
Sophie
I am puzzled that you have the question but you do not have the answer??
Without perfect information, X has an expected value of 13,300, and Y has an expected value of 13,500. Therefore you would choose Y and have an expected 13,500.
With perfect information, if you are told the state is good you will choose X and get 20,000.
If told fair you will choose Y and get 16,000. If told poor you will choose Y and get 7,000.Therefore with perfect information the expected value is (20,000 x 0.2) + (16,000 x 0.5) + (7,000 x 0.3) = 14,100
Therefore the most to pay for perfect information is 14,100 – 13,500 = $600
Hello Sir hope you are doing well.
Sir i had a doubt in this question. As per B.P.P the Value of perfect information is
Expected Value of the benefit with perfect information.
(Less) Expected Value of the benefit without perfect information.And the Question seems to be asking “Expected Value” of perfect information as to the state of the market. Rather than mentioning as “Value of Perfect Information”.
Can you please help me out regarding this
The value of the perfect information is exactly as you have quoted from BPP i.e. the expected value with PI less the expected value without PI, and is exactly as is explained in my free lectures.
Yes Sir but the question above has asked the Expected Value of Perfect Information and not Value of Perfect Information.
So shouldn’t the answer be $14,100 and not $ 600.
No.
It does not ask for the EV with PI. It asks for the expected value of PI.
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