The Following Table Displays the Payoffs (In Thousands of Dollars)

question 36

Essay

The following table displays the payoffs (in thousands of dollars) for five different decision alternatives under three possible states of nature: $\begin{array} { ccc }&\text { Alternative }\\\text { State of Nature }& a_{1} & a_{2} & a_{3}& a_{4}& a_{5}\\s_{1} & \$ 100 & \$ 80 & \$ 35 & \$ 20 & \$ 0 \\s_{2} & \$ 70 & \$ 75 & \$ 55 & \$ 50 & \$ 15 \\s_{3} & -\$ 30 & \$ 0 & \$ 35 & \$ 55 & \$ 60\end{array}$
The prior probabilities of the states of nature are:
P( $S _ { 1 }$ ) = 0.2, P( $S _ { 2 }$ ) = 0.3, P( $S _ { 3 }$ ) = 0.5
a. Calculate the expected monetary value for each alternative with present information. What decision should be made using the EMV criterion?
b. Calculate the expected payoff with perfect information.
c. Calculate the expected value of perfect information.
d. Convert the payoff table to an opportunity loss table.
e. Calculate the expected opportunity loss for each act with present information. What decision should be made using the EOL criterion?

---

Definitions:

Optimal R&D

The ideal level of spending on research and development that maximizes an organization's returns or benefits.

Oligopolists

Firms or entities that operate in an oligopoly, a market structure characterized by a small number of sellers that dominate the market.

R&D

Stands for Research and Development, which refers to investigative activities a business conducts to improve existing products and procedures or to lead to the development of new products and procedures.

Economic Profit

The difference between total revenue and total costs, including both explicit and implicit costs, representing the actual profitability of a company beyond just its accounting profits.