Page 270 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 12

Example 3

What is the maximum amount that the pizza parlour would pay for
perfect information about the daily demand for pizza slices?

Solution

With perfect information demand will always equal supply. The expected value
will then be (40 × 0.1) + (60 × 0.2) + (80 × 0.5) + (100 × 0.2) = $76.

Without the information the expected value was $52. Therefore the perfect
information is worth $20.

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