The prior probabilities for a loan are: p(s1) = 0.7 and p(s2…
The prior probabilities for a loan are: p(s1) = 0.7 and p(s2) = 0.3, where s1 is repay and s2 is default. The decision alternatives are: d1 – make loan, and d2 – do not make loan. The payoff table is as follows: s1 s2 d1 10000 -20000 d2 6000 6000 The firm can acquire sample information in the form of a credit report that has three possible outcomes: high (H), medium (M), and low (L). The relevant conditional probabilities are: p(H | s1) = 0.60, p(M | s1) = 0.30, p(L | s1) = 0.10 p(H | s2) = 0.10, p(M | s2) = 0.10, p(L | s2) = 0.80 Compute the expected value of the sample information. Would it be worthwhile to pay $1000 for the report? Show all work.
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