Question

Suppose that you have an option to hire a consultant who has the ability to predict the future with 100 percent accuracy. Using the consultant's reliable recommendations, you found that the expected value with perfect information is equal to $200. Without the consultant's insights you determined the EMV to be equal to $175. Would you pay the consultant $30 for her service? Why or why not? 0

a. Yes, because EVP1 is $30.
b. No, because EVPI is $30.
c. Yes, because expected value with perfect information is higher than the consultant's fee.
d. No, because EVPI is $25, which is less than the consultant's fee of $30

Answer 1

correct option is d. No, because EVPI is $25, which is less than the consultant's fee of $30

Step-by-step explanation:

given data

accuracy = 100 %

perfect information = $200

EMV = $175

to find out

Expected Value of perfect Information

solution

we know that Expected Value of perfect Information (EVPI) is the maximum that needs to be paid to obtain perfect information

so

Expected value of perfect information = perfect information - EMV ..........1

put here value we get

Expected value of perfect information = $200 - $175

Expected value of perfect information = $25

so correct option is d. No, because EVPI is $25, which is less than the consultant's fee of $30