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Q 107 bpp having 3 types of project and demand.
Sir in this I know I how to calculate value of imperfect information that is value with the highest expected value.But sir to calculate expected value of perfect information should be 0.1 X 70000 and 0.4 X 20000 and 0.5×(6000) .
After that we reduce it from value of imperfect information to get the ans.But they have did something else and in am unable to understand why.
Thank youIf they do not have perfect information then they would choose the project with the highest expected value, which is Project 3 and gives an EV of $10,000.
If they do have perfect information, then depending what information they receive they will choose the project giving the highest return.
If they are told that there will be strong demand then they will choose Project 1 and get $70,000. If they are told that there is moderate demand then they will choose Project 3 and get 20,000. If they are told that there is weak demand then they will choose Project 2 and get $5,000.The probabilities of being told each of the demand is the same as the probability of those demands occurring, and therefore the EV with perfect information is:
(0.1 x 70,000) + (0.4 x 20,000) + (0.5 x 5,000) = $17,5000.I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
(Incidentally, the initial EV of $10,000 by choosing Project 3 is not a case of imperfect information – it is when there is no information. Imperfect information is something different and is again explained in my free lectures.)
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