What is the expected value of perfect information

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Reference no: EM13180023

Value of perfect and sample information

A firm is considering the marketing of a new product which will either be a success or a failure. The prior probability of success is judged to be 0.3. If the product is marketed and is a success the firm expects to earn $500 000, while a failure is expected to lead to a loss of $300 000.

(a) Should the product be marketed? Why?

(b) What is the expected value of perfect information about the success or failure of the product

The firm is considering a market survey whose results can be classified as favourable, neutral or unfavourable. Some of the conditional probabilities are:

p(favourable|success) = 0.6 p(neutral|success) = 0.3 p(neutral|failure) = 0.2, p(unfavourable|failure) = 0.7.

(d) What is the maximum the firm should be willing to pay for the market survey?

Reference no: EM13180023

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