Fenton and Farrah Friendly, husband-and-wife car dealers, are soon going to open a new dealership. They have two offers: from a foreign compact car company and from a U. S. producer of full sized cars. The success of each type of dealership will depend on how much gasoline is going to be available during the next few years. The profit from each type of dealership, given the availability of gas, is shown in the following payoff table:
Gasoline Availability
Dealership Shortage Surplus expected value
.6 .4
Compact cars $300,000 $150,000 $240,000
Full-sized cars –100,000 600,000 $180,000
Trucks 120,000 170,000 $140,000
A. Determine which type of dealership the couple should purchase using the expected value criterion.
B. Determine the expected value of perfect information.