In your own words, explain how to obtain the “expected value of perfect information” for any payoff table, which has probabilities associated with each state of nature. Then, provide an example, drawing from any of the payoff tables in Problems 1-17 in the back of Chapter 12. If no probabilities are given for the states of nature, then assume equal likelihood.
A concessions manager at the Tech versus A&M football game must decide whether to have the vendors sell sun visors or umbrellas. There is a 30% chance of rain, a 15% chance of overcast skies, and a 55% chance of sunshine, according to the weather forecast in College Junction, where the game is to be held. The manager estimates that the following profits will result from each decision, given each set of weather conditions:
Decision Rain .30 Overcast .15 Sunshine .55
Sun visors $−500 $−200 $1,500
Umbrellas 2,000 0 −900
Compute the expected value for each decision and select the best one.
Develop the opportunity loss table and compute the expected opportunity loss for each decision.