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The difference between the expected value of an optimal strategy based on sample

information and the "best" expected value without any sample information is called the

a. information sensitivity.
b. expected value of sample information.
c. expected value of perfect information.
d. efficiency of sample information.

User Wogan
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Final answer:

The difference between the expected value of an optimal strategy with and without sample information is the expected value of perfect information (EVPI). EVPI quantifies the usefulness of having complete information for decision-making, especially under uncertainty. Imperfect information, therefore, influences economic outcomes like equilibrium price and quantity in markets.

Step-by-step explanation:

The difference between the expected value of an optimal strategy based on sample information and the 'best' expected value without any sample information is called the expected value of perfect information (EVPI). The EVPI represents the maximum amount a decision-maker would be willing to pay to eliminate uncertainty, which highlights the value of perfect information in making informed decisions. In many scenarios, including labor and financial capital markets, imperfect or asymmetric information can lead to suboptimal decision-making. Employers, for instance, gather information about a job applicant, like Greta, but imperfect information may still exist regarding the applicant's true abilities or quality. This imperfect information can influence key economic outcomes, like equilibrium price and quantity, as it affects the decisions buyers and sellers make in the marketplace.

To mitigate the effects of imperfect information, individuals and organizations seek additional data or signals such as educational credentials, references, and historical performance. In labor markets, this could involve employers favoring candidates with higher degrees or specific accolades as indicators of potential performance. Ultimately, the EVPI provides a quantifiable measure of just how valuable complete information would be when facing decisions under uncertainty.

User Bwangel
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