A small building contractor has recently experienced two successive years in which work opportunities exceeded the firms capacity. The contractor must now make a decision on the capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P (low) = .3 and P (high) = .7.

Next Years

Alternative Demand

Low High

Do nothing $50* $60

Expand 20 80

Subcontract 40 70

*Profit in $ thousands.

a-1. Determine the expected profit of each alternative. (Enter your answers in thousands. Omit the $ sign in your response.)

Expected Profit

Do nothing $ thousand

Expand $ thousand

Subcontract $ thousand

a-2. Which alternative is best?

_____Do nothing

_____Expand

c. Compute the expected value of perfect information. (Enter your answers in thousands. Omit the $ sign in your response.)