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b. A plant manager wants to know how much she should be willing to pay for perf...

May 8, 2024

Solution by Steps

step 1

Calculate the expected monetary value (EMV) for the large plant under both market conditions

step 2

EMV for large plant:

\frac{1}{2}(MYR100,000) + \frac{1}{2}(-MYR80,000) = MYR10,000

step 3

Calculate the expected monetary value (EMV) for the small plant under both market conditions

step 4

EMV for small plant:

\frac{1}{2}(MYR5,000) + \frac{1}{2}(MYR0) = MYR2,500

step 5

Determine the maximum EMV without perfect information

step 6

Maximum EMV without perfect information:

\max(MYR10,000, MYR2,500) = MYR10,000

step 7

Calculate the EMV with perfect information

step 8

EMV with perfect information:

\frac{1}{2}(MYR100,000) + \frac{1}{2}(MYR0) = MYR50,000

step 9

Determine the value of perfect information (VPI)

step 10

VPI:

MYR50,000 - MYR10,000 = MYR40,000

Answer

The plant manager should be willing to pay up to MYR40,000 for perfect market research.

Key Concept

Value of Perfect Information (VPI)

Explanation

VPI is the difference between the EMV with perfect information and the maximum EMV without perfect information. It represents the maximum price one should be willing to pay for perfect information.