- This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
Viewing 4 posts - 1 through 4 (of 4 total)
- You must be logged in to reply to this topic.
Specially for OpenTuition students: 20% off BPP Books for ACCA & CIMA exams – Get your BPP Discount Code >>
Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Question from chapter 10 Risk and Uncertainty
Dear Professor Moffat,
I did not understand the answer of Example 1 part c (expected return with perfect knowledge)
Can you please explain this part as it was not covered in the lecture.
There is actually a typing error in the answer 🙁
Perfect knowledge means that we can find out what the demand will be (by, for example, paying for market research), before we make the decision as to how many to sign the contract for.
Obviously we don’t know what answer the market research will give us before we pay for it!
In the table at the top of page 118, is listed what would be the best decision (and the outcome) for each of the possible results from the market research. Therefore the expected return with the perfect knowledge is $4,800.
Without the perfect knowledge, then we already know from (b) (i), that the best course of action would give an expected return of $4,500 (not 4,400 as printed on page 118).
Therefore the benefit of having perfect knowledge is the difference between 4,800 and 4,500, which is $300. This is therefore the most that we would be prepared to pay.
Thank you for clearing that up.
I have another question regarding example 2; there is a line which says that in either case, the probability of the refurbishment achieving a good result has been estimated to be 2/3. How would we know that we write 2/3 in the tree branch of ‘good’ of ‘do not buy market research’ or ‘good’ of ‘buy market research’.
Can you please clarify this, professor…..
2/3 only applies if we do not buy the market research.
The reason we know this, is that if we buy the market research, then we are hoping to know in advance whether or not there will be a good result.
If the market research was perfect, then if it said good result then we would be certain it would be good (100%).
However the question says that because the market research is not perfect, then if the research says ‘good’ there is a 91% chance that it actually will be good.