Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. The expected value of perfect information is 70.

Question

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below.  Suppose that Julie estimates the following probabilities for each level of restaurant popularity.  The expected value of perfect information is 70.

Quizplus · Accepted Answer

The expected value of perfect information (EVPI) is defined as the difference between the expected payoff under certainty and the expected payoff under risk. In this case, the expected payoff under certainty is the maximum of the payoffs for each state of nature, which is $7000. The expected payoff under risk can be calculated as a weighted average of the payoffs for each state of nature, using the probabilities given by Julie. This gives an expected payoff of $5425. The EVPI is therefore $1575, which is greater than the given value of $70. Therefore, the statement is true.

Julie Is Planning to Open a Restaurant and Is Considering