In your own words, explain how to obtain the “expected value of perfect information” for any payoff table, which has probabilities associated with each state of nature. Then, provide an example, drawing from any of the payoff tables in Problems 1-17 in the back of Chapter 12. If no probabilities are given for the states of nature, then assume equal likelihood.
1. A farmer in Iowa is considering either leasing some extra land or investing in saving certificates at the local bank. If weather conditions are good next year, the extra land will give the farmer an excellent harvest. However, if weather conditions are bad, the farmer will lose money. The saving certificates will result in the same return, regardless of the weather conditions. The return for each investment, given each type of weather condition, is shown in the following payoff table: Weather
Decision Good Bad
Lease land $90,000 $-40,000 Buy saving certificate 10,000 10,000
Select the best decision, using the following decision criteria:
a. Maximax
b. Maximin