Question

The owner of a small business is considering three options: buying a computer, leasing a computer, or getting along without a computer. Based on the information obtained from the firm’s accountant, the following payoff table (in terms of net profit) was developed:

	State of Nature
Alternative	S1	S2	S3
A1	4	2	5
A2	8	2	3
A3	3	4	6

Based on the probability for each state of nature in previous question(the probability for S1 to happen is twice of the probability of S2. Probability for S2 to happen is three times of S3). What is the EREV?

Select one:

a. 3.5

b. Can’t be computed with the given information

c. 3.6

d. 5.7

Answer 1

Given data

probability for s1 happen =p1

probability for s2 happen = p2

probability for s3 happen= p3

p1=2p2

p2=3p3

p1=6p3

p1+p2+p3=1

6p3+3p3+p3=10

p3=0.1

P2=0.3

p1=0.6

Expected value = sum of pi*si

Payoff table

Alternative	State of nature
S1	S2	S3
A1	4	2	5
A2	8	2	3
A3	3	4	6

Probability table

	S1	S2	S3
pi	0.6	0.3	0.1

EREV

Alternative	State of nature	EREV
S1	S2	S3
A1	4	2	5	3.5
A2	8	2	3	5.7
A3	3	4	6	3.6

so here we can see the max value is 5.7,

so we choose a2 alternative and we get a expected return is 5,7

Option -D