A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm's capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P (low) = .30 and P (high) = .70.
Alternative Low High Do nothing $48* $61
Expand 23 81
Subcontract 26 71
a. Determine the expected profit of each alternative.
Do nothing: Expected Profit
Expand: Expected Profit
Subcontract: Expected Profit
b. Compute the expected value of perfect information.