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While calculating value of perfect information do we reduce any cost incurred specifically to obtain that information such as the “fees paid to market research agency for providing us with perfect information”?
No. We compare the value of the information with the cost of the information, as I explain in my free lectures.
Respected Sir i came across this question
A company wishes to go ahead with one of we mutually exclusive projects, but the profit: outcome from each project will depend on the strength of sales demand, as follows.
Strong demand: project 1 80k project 2 60k and prob 0.2
Moderate demand: project 1 50k project 2 25k and prob 0.4
weak demand: project 1 -5k project 2 10k and prob 0.4“The company could purchase market research information, at a cost of 4,500.” This would predict demand conditions with perfect accuracy.
What is the value to the company of obtaining the perfect market research information?In the solution they reduced $4,500 cost at the end resulting $1,500 being the answer and NOT $6,000 which according to me should be correct (according to what you taught us)
There is a subtle change in the wording.
The question does not ask for the value of the perfect information – that is $6,000.
Instead is asks for the value to the company of obtaining it. The value of the information itself is $6,000. The cost of obtaining it is $4,500. Therefore the value to the company if they do obtain it is $1,500. Obviously that would not bother obtaining it if the cost of obtaining it was more than $6,000.
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