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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 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 conditions

step 4

EMV for small plant:

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

step 5

Determine the expected value of perfect information (EVPI)

step 6

EVPI:

EMV_{\text{with perfect information}} - EMV_{\text{without perfect information}}

step 7

EMV with perfect information is the best outcome with known future:

\max(MYR100,000, MYR5,000) = MYR100,000

step 8

EMV without perfect information is the best EMV among the current options:

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

step 9

Calculate EVPI:

MYR100,000 - MYR10,000 = MYR90,000

Answer

The plant manager should be willing to pay up to MYR90,000 for perfect information.

Key Concept

Expected Value of Perfect Information (EVPI)

Explanation

EVPI is the maximum amount that a decision-maker should be willing to pay for information that would eliminate uncertainty about which state of nature will occur. It is calculated as the difference between the EMV with perfect information and the EMV without perfect information.