The highest possible expected monetary value. Introduction: EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

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Answer 1

Question

Chapter A, Problem 7P

a.

Summary Introduction

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

b.

Summary Introduction

To determine: Expected value with perfect information

Introduction

Expected value with perfect information is average expected return which we have perfect information about their state of nature before decision has to be taken

It is average worth of information which we have, basically expected value if the perfect information is available before decision made

c.

Summary Introduction

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

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Payoff Table Decision Alternatives Demand Low Medium High Small, d1 400 500 600 Medium, d2 100 600 800 Large, d3 -300 400 1200 1). If nothing is known about the demand probabilities, what are the recommended decision using the Maximax (optimistic), Maximin (pessimistic) and Equally Likely? 2). If P(low) = 0.20, P(medium) = 0.35, and P(high) = 0.45. What is the recommended decision using the expected monetary value approach? 3). What is the expected value of perfect information (EVPI)?

Mickey Lawson is considering investing some money that he inherited. The following payoff table gives the profit that would be realized during the next year for each of three investments alternatives Mickey is considering: State of Nature Decision alternatives Good Economy Poor Economy Stock market 80,000 -20,000 Bonds 30,000 20,000 CDs 23,000 23,000 Probability 0.5 0.5 Compute decision would maximize expected profits. Compute the maximum amount that should be paid for a perfect forecast of the economy.

Following is the payoff table for the Pittsburgh Development Corporation (PDC) Condominium Project. Amounts are in millions of dollars. State of Nature Decision Alternative Strong Demand S1 Weak Demand S2 Small complex, d1 8 7 Medium complex, d2 14 5 Large complex, d3 20 -9 Suppose PDC is optimistic about the potential for the luxury high-rise condominium complex and that this optimism leads to an initial subjective probability assessment of 0.8 that demand will be strong (S1) and a corresponding probability of 0.2 that demand will be weak (S2). Assume the decision alternative to build the large condominium complex was found to be optimal using the expected value approach. Also, a sensitivity analysis was conducted for the payoffs associated with this decision alternative. It was found that the large complex remained optimal as long as the payoff for the strong demand was greater than or equal to $17.5 million and as long as the payoff for…

Answer 2

Question

Chapter A, Problem 7P

a.

Summary Introduction

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

b.

Summary Introduction

To determine: Expected value with perfect information

Introduction

Expected value with perfect information is average expected return which we have perfect information about their state of nature before decision has to be taken

It is average worth of information which we have, basically expected value if the perfect information is available before decision made

c.

Summary Introduction

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

Expert Solution & Answer

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Answer 3

Question

Chapter A, Problem 7P

a.

Summary Introduction

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

b.

Summary Introduction

To determine: Expected value with perfect information

Introduction

Expected value with perfect information is average expected return which we have perfect information about their state of nature before decision has to be taken

It is average worth of information which we have, basically expected value if the perfect information is available before decision made

c.

Summary Introduction

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

Expert Solution & Answer

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Answer 4

Question

Chapter A, Problem 7P

a.

Summary Introduction

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

b.

Summary Introduction

To determine: Expected value with perfect information

Introduction

Expected value with perfect information is average expected return which we have perfect information about their state of nature before decision has to be taken

It is average worth of information which we have, basically expected value if the perfect information is available before decision made

c.

Summary Introduction

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

Expert Solution & Answer

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Answer 5

Chapter A, Problem 7P

a.

Summary Introduction

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

b.

Summary Introduction

To determine: Expected value with perfect information

Introduction

Expected value with perfect information is average expected return which we have perfect information about their state of nature before decision has to be taken

It is average worth of information which we have, basically expected value if the perfect information is available before decision made

c.

Summary Introduction

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

Answer 6

Chapter A, Problem 7P

a.

Summary Introduction

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

Answer 7

Chapter A, Problem 7P

a.

Summary Introduction

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

Answer 8

b.

Summary Introduction

To determine: Expected value with perfect information

Introduction

Expected value with perfect information is average expected return which we have perfect information about their state of nature before decision has to be taken

It is average worth of information which we have, basically expected value if the perfect information is available before decision made

Answer 9

b.

Summary Introduction

To determine: Expected value with perfect information

Introduction

Expected value with perfect information is average expected return which we have perfect information about their state of nature before decision has to be taken

It is average worth of information which we have, basically expected value if the perfect information is available before decision made

Answer 10

c.

Summary Introduction

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

Answer 11

c.

Summary Introduction

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. A - Prob. 1DQ Ch. A - Prob. 2DQ Ch. A - Prob. 3DQ Ch. A - Prob. 4DQ Ch. A - Prob. 5DQ Ch. A - Question: 6. Explain how decision trees might be...Ch. A - Prob. 7DQ Ch. A - Prob. 8DQ Ch. A - Question 9. Identify the five steps in analyzing a...Ch. A - Prob. 10DQ

The highest possible expected monetary value. Introduction: EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

Solution Summary: The author explains that the highest expected monetary value is for Alternative 3, which is 29,000.

Concept explainers

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

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Chapter A Solutions

The highest possible expected monetary value. Introduction: EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

Solution Summary: The author explains that the highest expected monetary value is for Alternative 3, which is 29,000.

Concept explainers

To determine: The highest possible expected monetary value. Introduction: EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

To determine: The expected value of perfect information Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

Want to see the full answer?

Chapter A Solutions

To determine: The highest possible expected monetary value.

Introduction:

EMV: Expected monetary value (EMV) is the expected value or payout that has different possible state of nature, each with their associated possibilities.

To determine: The expected value of perfect information

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.