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

Essay

A high-school student who started doing photography as a hobby is considering going into the photography business. The anticipated payoff table is: $\begin{array}{ll}&\text { Alternative }\\\text { State of Nature }&\begin{array}{cc}\text { Start } \quad \text { Do not start } \\\text { new business } \quad \text { new business }\end{array}\\\begin{array}{ll}\text {Poor }\\\text {Fair }\\\text {Super }\end{array}&\begin{array}{|ll|}\hline-\$ 12000 \quad\quad\quad& 0\quad\quad\quad \\\$ 10000 & 0 \\\$ 15000 & 0 \\\hline\end{array}\end{array}$
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?