EBK OM
6th Edition
ISBN: 9781305888210
Author: Collier
Publisher: YUZU
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Chapter 4, Problem 14PA
Summary Introduction
Interpretation:Expected value of perfect information (EVPI) Concept introduction:It measures how much better you could do on any decision if you could get the right information prior to the occurrence of each state. EVPI basically represents how much amount someone is willing to pay in order to get perfect information.
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What information does a decision maker need in order to perform an expected value analysis of a problem?
Samantha’s Group of Companies is deciding if it should design an advertising system for use on its website. The first option is to skip out on designing, with no net costs or gains. The second option is System A, which would result in additional sales of either $25,000 under good conditions or -$15,000 under bad conditions. The final choice is System B, which would increase sales -$5,000 under both good and bad conditions.
Note that it costs $25,000 to develop a system. Assume that good conditions are TWICE as likely as the bad conditions. (Hint: twice as likely means a ratio of 2:1).
Calculate expected monetary values for all courses of action and which option should the company pursue? Justify your response.
Samantha’s Group of Companies is deciding if it should design an advertising system for use on its website. The first option is to skip out on designing, with no net costs or gains. The second option is System A, which would result in additional sales of either $25,000 under good conditions or -$15,000 under bad conditions. The final choice is System B, which would increase sales -$5,000 under both good and bad conditions.
Note that it costs $25,000 to develop a system. Assume that good conditions are TWICE as likely as the bad conditions. (Hint: twice as likely means a ratio of 2:1).
Outline the ultimate objective for the use of decision trees in product design. How is this objective accomplished?
Draw the appropriate decision tree for the above problem.
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