Question

Patrick Bateman is considering four alternatives Friday night. The payoff for each opportunity will depend on economic conditions, and are represented in the payoff table below.

	Poor	Average	Good	Excellent
Return videotapes	50	25	40	25
Dinner at Dorsia	80	300	20	10
Pick up friends in his limo	100	15	25	50
Design new business cards	25	75	-50	30

If the probabilities of each economic condition are 0.50, 0.15, 0.20, and 0.15, respectively, what is the EXPECT VALUE OF PERFECT INFORMATION?

Answer 1

here expected value of Return videotapes

=E(Return videotapes)=50*0.5+25*0.15+40*0.2+25*0.15=40.5

E(Dinner at Dorsia)=80*0.5+300*0.15+20*0.2+10*0.15 =90.5

E(Pick up friends in his limo)=100*0.5+15*0.15+25*0.2+50*0.15=64.75

E(Design new business cards)=25*0.5+75*0.15+(-50)*0.2+30*0.15=18.25

therfore expected value without perfect information=max(40.5,90.5,64.75,18.25)=90.5

expected value with perfect information=0.5*100+0.15*300+0.2*40+0.15*50=110.5

therefore EXPECTED VALUE OF PERFECT INFORMATION

=expected value with perfect information-expected value without perfect information=110.5-90.5=20