A High-School Student Who Started Doing Photography as a Hobby

question 18

Essay

A high-school student who started doing photography as a hobby is considering going into the photography business. The anticipated payoff table is: $\begin{array} { ccc }&\text { Alternative }\\\text { State of Nature }& \text { Start new business}& \text { Do not start new business}\\\text { Poor } & -\$ 12000 & 0 \\\text { Fair } & \$ 10000 & 0 \\\text { Super } & \$ 15000 & 0 \\\end{array}$
The following prior probabilities are assigned to the states of nature:
P(poor) = 0.4, P(fair) = 0.4 , P(super) = 0.2.
a. Calculate the expected monetary value for each act with present information. What decision should be made using the EMV criterion?
b. Convert the payoff table to an opportunity loss table.
c. Calculate the expected opportunity loss for each act with present information. What decision should be made using the EOL criterion?
d. Review the decisions made in a. and c. Is this a coincidence? Explain.
e. What is the expected payoff with perfect information?
f. What is the expected value of perfect information? What does it mean?

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Definitions:

Probability

A measure of how likely an event is to occur, expressed as a number between 0 and 1.

Satisfied Customers

Individuals who have had their expectations met or exceeded by a product or service, leading to a positive perception of the business.

Probability

A representation of event likelihood, numerically expressed within a 0 to 1 scale.

Normal Model

A type of statistical distribution that is symmetric and bell-shaped, describing how data values are dispersed or spread out.