EBK STATISTICS FOR MANAGEMENT AND ECONO
EBK STATISTICS FOR MANAGEMENT AND ECONO
10th Edition
ISBN: 9780100546462
Author: KELLER
Publisher: YUZU
Question
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Chapter 22.2, Problem 17E
To determine

Calculate the EVPI.

Expert Solution & Answer
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Explanation of Solution

The EPPI value can be calculated as follows.

EPPI=(PayoffMaximum s1 row×P(s1)+PayoffMaximum s2 row×P(s2)+PayoffMaximum s3 row×P(s3))=(110×0.1+150×0.25+250×0.15)=196

The value of EPPI of produce is 196.

The EMV value of a1 can be calculated as follows.

EMVa1=(Payoffa1, s1×P(s1)+Payoffa1, s2×P(s2)+Payoffa1, s3×P(s3)+Payoffa1, s4×P(s4))=(60×0.1+40×0.25+220×0.5+250×0.15)=163.5

The value of EMV of a1 is 163.5.

The EMV value of a2 can be calculated as follows.

EMVa2=(Payoffa2, s1×P(s1)+Payoffa2, s2×P(s21)+Payoffa2, s3×P(s3)+Payoffa2, s4×P(s4))=(110×0.1+110×0.25+120×0.5+120×0.15)=116.5

The value of EMV of a2 is 116.5.

The EMV value of a3 can be calculated as follows.

EMVa3=(Payoffa3, s1×P(s1)+Payoffa3, s2×P(s21)+Payoffa3, s3×P(s3)+Payoffa3, s4×P(s4))=(75×0.1+150×0.25+85×0.5+130×0.15)=107

The value of EMV of a3 is 116.5. Since the EMV for a1 is greater, select the option a1.

The value of EVPI can be calculated as follows.

EVPI=EPPIEMVa1=196163.5=32.5

The value of EVPI is 32.5.

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