The following is a payoff table giving profits for various s

The following is a payoff table giving profits for various situations

                                                        STATES OF NATURE

                                                                   DEMAND

ALTERNATIVES                 LOW                   MEDIUM                        HIGH

Alternative 1                         80                          120                                140

Alternative 2                         90                            90                                  90

Alternative 3                         50                            70                                150

The probabilities for states of nature Low, Medium, and High are 0.25, 0.55, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value of perfect information (EVPI)?

Solution

Let us prepare table with frequency * probability

For example alternative 1 80 becomes 80(0.25) = 20

Hence expected value = total of all these = 55+154+76

= 285.