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Chapter 7
The value of perfect information
In many questions, the decision makers receive a forecast of a future
outcome (for example a market research group may predict the
forthcoming demand of a product). This forecast may turn out to be
correct or incorrect. The question often requires the candidate to
calculate the value of the forecast.
Value of information (perfect or imperfect) = expected profit (outcome)
WITH the information LESS expected profit (outcome) WITHOUT the
information.
8.1 Perfect information
The forecast of the future outcome is always a correct prediction. If a firm can obtain
a 100% accurate prediction, they will always be able to undertake the most beneficial
course of action for that prediction.
Illustrations and further practice
Now try TYU 4 ‘Geoffrey Ramsbottom – the value of perfect information’.
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