Page 207 - P1 Integrated Workbook STUDENT 2018

Risk and uncertainty

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.

Illustrations and further practice

Now try illustration 7 and example 4 from Chapter 14.

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