60.1K

Verified Solution

Link Copied!

The best expected daily profit without perfect information was found to be 222.5 paise (table 9.17). The difference of 27.5 paise is the maximum amount the newsboy will be willing to pay, per day, to a perfect predictor because this is the maximum amount by which he can increase his expected daily profit. This difference is the expected value of perfect information and is referred to as EVPI. There is no sense in paying more than 27.5 paise to the predictor since that will lower the expected daily profit. It may be noted that in example 9.5-2, 27.5 paise was the minimum expected loss (EOL). Thus it may be concluded that EVPI is equal to the minimum EOL. EVPI is an important concept in decision analysis. For a given problem, EVPI represents the maximum amount a person should pay to get additional information on which may be based the decision alternative. x=6 DECISION THEORY, GAMES, INVESTMENT ANALYSIS AND ANNUITY 783 EXAMPLE 9.5-3 A dairy firm wants to determine the quantity of butter it should produce to meet the demand. Past records have shown the following demand patterns: Quantity required No. of days demand (kg) occurred 15 6 20 14 25 20 30 80 40 35 40 30 50 10 The stock levels are restricted to the range 15 to 50 kg due to inadequate storing facilities. Butter costs 40 per kg and is sold at 50 per kg. (i) Construct a conditional profit table. (ii) Determine the action alternative associated with the maximization of expected profit. (iii) Determine El PI. [ST SM PGDM, 2009)

Answer & Explanation Solved by verified expert

See Answer