A local company has offered a construction job to a contractor. The value of the contract depends on the length of time it takes to complete the project. If the project is completed on time, there is a profit of $140,000. If the contractor is late finishing the project, he will lose $20,000. Weather is the sole determinant of whether the project would be late. If the weather is good, the project would be completed on time; if it is bad, the project will not be completed on schedule. Based on his past experience the contractor's subjective probability of good weather is 50 percent. The contractor, however, has an opportunity to buy a long-range forecast report at the cost of $10,000 from an independent weather- forecasting company. The weather forecasting company has a fairly good track record for these long-range forecasts. Its files indicate that 70% of the time it successfully predicted good weather, and 80 percent of the time it was able to predict bad weather. In other words, P(F;|W;) = 0.7; P(F2|W;) = 0.3; P(F;|W2) = 0.2; P(F2\W2) = 0.8 Where F, and F2 are forecasts of good and bad weather respectively; and W; and W2 are good and bad weather respectively. What is the Expected value of Survey Information, EVSI = What is the Expected value of Perfect Information, EVPI =
A local company has offered a construction job to a contractor. The value of the contract depends on the length of time it takes to complete the project. If the project is completed on time, there is a profit of $140,000. If the contractor is late finishing the project, he will lose $20,000. Weather is the sole determinant of whether the project would be late. If the weather is good, the project would be completed on time; if it is bad, the project will not be completed on schedule. Based on his past experience the contractor's subjective probability of good weather is 50 percent. The contractor, however, has an opportunity to buy a long-range forecast report at the cost of $10,000 from an independent weather- forecasting company. The weather forecasting company has a fairly good track record for these long-range forecasts. Its files indicate that 70% of the time it successfully predicted good weather, and 80 percent of the time it was able to predict bad weather. In other words, P(F;|W;) = 0.7; P(F2|W;) = 0.3; P(F;|W2) = 0.2; P(F2\W2) = 0.8 Where F, and F2 are forecasts of good and bad weather respectively; and W; and W2 are good and bad weather respectively. What is the Expected value of Survey Information, EVSI = What is the Expected value of Perfect Information, EVPI =
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A local company has offered a construction job to a contractor. The value of the contract depends on the length of time
it takes to complete the project. If the project is completed on time, there is a profit of $140,000. If the contractor is late
finishing the project, he will lose $20,000. Weather is the sole determinant of whether the project would be late. If the
weather is good, the project would be completed on time; if it is bad, the project will not be completed on schedule.
Based on his past experience the contractor's subjective probability of good weather is 50 percent. The contractor,
however, has an opportunity to buy a long-range forecast report at the cost of $10,000 from an independent weather-
forecasting company. The weather forecasting company has a fairly good track record for these long-range forecasts. Its
files indicate that 70% of the time it successfully predicted good weather, and 80 percent of the time it was able to
predict bad weather. In other words,
P(F:|W;) = 0.7; P(F2|W;) = 0.3; P(F;|W2) = 0.2; P(F2|W2) = 0.8
Where F; and F2 are forecasts of good and bad weather respectively; and W; and W2 are good and bad weather
respectively.
What is the Expected value of Survey Information, EVSI =
What is the Expected value of Perfect Information, EVPI =
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