Question
As part of the process of creating a foundation for a building, Mary must decide whether to purchase a large number of 40-foot (12-meter) steel
As part of the process of creating a foundation for a building, Mary must decide whether to purchase a large number of 40-foot (12-meter) steel piles or a large number of 50-foot (15-meter) steel piles, which will be driven into ground where the depth of the bedrock is either 40 feet or 50 feet. The alternatives are the different piles. The possible states of nature are the different depths of the bedrock. Each alternative and state-of-nature combination has a different cost: If she chooses the 40-foot pile and the bedrock is 40 feet deep, then the total cost is $500,000. If she chooses the 40-foot pile and the bedrock is 50 feet deep, then the total cost is $900,000. If she chooses the 50-foot pile and the bedrock is 40 feet deep, then the total cost is $600,000. If she chooses the 50-foot pile and the bedrock is 50 feet deep, then the total cost is $500,000. Mary believes that the probability that the bedrock depth is 40 feet equals 0.7 and the probability that the bedrock depth is 50 feet equals 0.3. Mary can proceed without acquiring more information, pay for a sonic test to determine (perhaps inaccurately) the depth (and then order the piles), or pay to drill a hole that will determine accurately the depth (and then order the piles). What is the expected value of the perfect information provided by drilling a hole?
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