Fiona is considering starting a company to produce designer dolls. She is uncertain about the market for these dolls, and, therefore, considers having a pilot study performed to see if the market for these dolls warrant producing them. If undertaken, the pilot study will cost her $10,000, and gives a final “prediction” of either “good market for product” or “bad market for product.” Ultiamtely, Fiona must decide on opening No plant (N), a Small plant (S), or a Large plant (L). If she builds a plant, her profit will depend on whether the market is “favorable” (F) or “unfavorable” (U). With a favorable market, Fiona’s profit will be $900,000 if she builds a large plant, and $600,000 if she builds the small plant. If the market is unfavorable, however, she will lose $300,000 if she builds the large plant, and $200,000 if she builds the small plant.
Fiona estimates that if the pilot study report says “good market,” the probability is .84 that the market will, indeed, be favorable; if the pilot study says “bad market,” the probability that market, indeed, will be unfavorable is .64. She also estimates that it is 50-50 as to what the pilot study says. Finally, she feels going in to the whole endeavor that the probability of favorable market is .6.
What is Fiona’s optimal strategy?
What is EVPI?