A small software developer has received an offer from a larger software company to purchase the rights to one of its apps for $120,000. The developer has estimated the probability distribution of profitability outcomes over the app’s lifetime as:
P($80,000) = .2, P($100,000) = .3, P($120,000) = .1, and P($140,000) = .4
Draw this up as a payoff table with decision alternatives, states of nature and payoffs.
Should the developer sell the app? (Show your supporting work.)
Considering the closeness of the decision, the developer is interested in obtaining a better forecast of the app’s profitability, but that would cost money. As an upper bound on what it might be worth to investigate further, what is the value of perfect information in this case?