he probability that it will rain on any given day is 0.20, and the probability is independent from day to day. You are trying to decide whether or not to make a tee time tomorrow to play golf. This requires a commitment on your part of turning down, say, movie tickets in favor of playing golf. If you accept the tickets, you also make the Commitment not to go golfing. There is a weather forecast that signals whether it will rain tomorrow or not. There s a 0.80 probability that it rains when there is a "rainy" forecast and a 0.125 probability of rain when there is a "sunny" forecast. The overall probability of getting a "rainy" forecast is 0.111. Assume you are risk neutral. You place the following monetary values on the potential outcomes:

he probability that it will rain on any given day is 0.20, and the probability is independent from day to day. You are trying to decide whether or not to make a tee time tomorrow to play golf. This requires a commitment on your part of turning down, say, movie tickets in favor of playing golf. If you accept the tickets, you also make the Commitment not to go golfing. There is a weather forecast that signals whether it will rain tomorrow or not. There s a 0.80 probability that it rains when there is a "rainy" forecast and a 0.125 probability of rain when there is a "sunny" forecast. The overall probability of getting a "rainy" forecast is 0.111. Assume you are risk neutral. You place the following monetary values on the potential outcomes:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The probability that it will rain on any given day is 0.20, and the probability is independent from day to day. You
are trying to decide whether or not to make a tee time tomorrow to play golf. This requires a commitment on your
part of turning down, say, movie tickets in favor of playing golf. If you accept the tickets, you also make the
commitment not to go golfing. There is a weather forecast that signals whether it will rain tomorrow or not. There
is a 0.80 probability that it rains when there is a "rainy" forecast and a 0.125 probability of rain when there is a
"sunny" forecast. The overall probability of getting a "rainy" forecast is 0.111.
Assume you are risk neutral. You place the following monetary values on the potential outcomes:
a sunny day at $95
the golf course
a rainy day at
the movies
a rainy day at
home
a sunny day at
the movies
$20
-$18
$1

Taking into account the optimal decisions above, what is the value of the information communicated by the
forecast? Note: Defined as the difference between the values of the informed and uninformed decisions.

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Step 1: Calculate the probability of it raining or being sunny.

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Step 2: Calculate the expected value of planning to golf or go to the movies.

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Step 3: Calculate the Value of Perfect Information (VPI)

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