Chapter 20.2, Problem 3E

Hudson Corporation is considering three options for managing its data processing operation: continue with its own staff, hire an outside vendor to do the managing (referred to as outsourcing), or use a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows:

1. a. If the demand probabilities are .2, .5, and .3, which decision alternative will minimize the expected cost of the data processing operation? What is the expected annual cost associated with your recommendation?
2. b. What is the expected value of perfect information?