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Suppose that a company want to make a decision between two mutually exclusive options, Option A and
Option B. the profits from each option will depend on the state of the economy in the next 12 months.
Current estimates are that there is a 60% probability that the economy will be weak and a 40% probability
that the economy will be strong.
The profitability with each decision option would be as follows.
Option A Option B
Weak economy + $50,000 + $20,000
Strong economy + $60,000 + $100,000
Research could be carried out into the state of the economy in the next 12 months. It has been estimated
that if the true state of the economy will be weak, there is an 80% probability that the research would
predict this correctly. It is also estimated that if the true state of the economy will be strong, there is an
90% probability that the research would predict this correctly.Whats the value of Perfect Information?
kindly help
You must have an answer in the BPP Study Text, and you cannot expect me to produce a full answer here – especially since it is impossible for me to draw a decision tree here!!
Have you watched my lecture working through the second example in the decision making under uncertainty chapter of the free lecture notes? It is a very similar example of using a decision tree to calculate the value of imperfect information.
Obviously in the exam you could not be asked this question because you can no longer be required to draw a decision tree (although you are expected to know what they are and be able to deal with one if one is already drawn for you in the exam question).
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