Answer (B) is correct . The maximum amount the seller should pay for perfect information is the difference between the expected profit with perfect information and the expected profit if demand is not known. With perfect information, supply is the correct amount of units to maximize profit at each level of demand. Thus, the expected profit with perfect information is computed as follows:? (.1 × $0) + (.3 × $40) + (.4 × $80) + (.2 × $120) = $68. Without perfect information, the seller should purchase the supply that will result in the ? maximum long-run profit. Using the information given, it can be determined that the profit will be $20 when the supply is 4 units. It is also evident that the profit is zero when the supply is zero. The expected profit must also be calculated for supply levels of 2 and 6 units. For a supply of 2?units, the expected profit is .1(–$80) + .3($40) + .4($40) + .2($40) = $28 For a supply of 6 units, the expected loss is the difference.
Answer (A) is incorrect because This figure is the amount of profit with perfect information.
Answer (C) is incorrect because The price paid for perfect information equals the difference between profits expected with perfect information and profits without perfect information.
Answer (D) is incorrect because The price paid for perfect information equals the difference between profits expected with perfect information and profits without perfect information.
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The price Butler and Burnside are willing to pay for perfect information is
