Peter J Wilcoxen > PAI 789 Advanced Policy Analysis

Buying Information (p05)

Now let's make the previous network upgrade more interesting. Suppose a consulting firm has offered to carry out a study that would determine whether or not the network upgrade in the previous problem would succeed before the agency undertakes it. The study would cost $4 million. For reference, here is the key data from the earlier problem: Current system: cost=$10M, benefits=$30M. Upgrade: cost=$20M, 60% chance benefits=$60M, 40% chance benefits=$20M. The previous conclusion was to carry out the upgrade for an EV of $24 million.

  1. Please draw an appropriate decision tree and determine whether or not the agency should hire the consulting firm.
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 07/26/2021