An art dealer has a client who will buy the masterpiece Rain Delay for $50,000.

The dealer can buy the painting now

for $40,000 (making a pro_x000C_t of $10,000). Alternatively, he can wait one day, when the price will go down to
$30,000. The dealer can also wait another day when the price will be $25,000. If the dealer does not buy by that
day, then the painting will no longer be available. On each day, there is a 2/3 chance that the painting will be sold
elsewhere and will no longer be available.

(a) Draw a decision tree representing the dealers decision making process.
(b) Solve the tree. What is the dealers expected proit? When should he buy the painting?
(c) What is the Expected Value of Perfect Information (value the dealer would place on knowing when the item will
be sold)?
PF = Profit
(a)
10000 PF 20000 PF 25000 PF
Buy Buy Buy
Avail
Avail
Dont Dont Dont
0 PF
Sold
2/3 % Sold
2/3 %
(b) The value is 10, for an expected pro t of $10,000. He should buy the painting immediately.

(c) With probability 2/3, the painting wil l be sold on the 1rst day, so should be bought immediately. With
probability 1/3(2/3) it wil l be sold on the second day, so should be bought after one day. Final ly, with probability
1/3(1/3) it wil l not be sold on the _x000C_rst two days, so should be bought after two days. The value of this is
2/3(10)+1/3(2/3)20+1/3(1/3)25 = 13.89. The EVPI is therefore $3,889.