Decision Alternative Up S₁ Stable s2 Down S3 Investment A, d₁ Investment B, d₂ Investment C, d3 Probabilities $70,000 $45,000 $20,000 Profit Investment A, d Investment B, d₂ Investment C, d 100 70 0.95 Economic Conditions 45 Profit Decision Maker A 0.85 0.45 0.65 (a) Using the expected value approach, which decision is preferred? E(d₂) - $68 ✔ thousand E(d₂) = $56.25 thousand E(d₂) - $45 ✔ thousand The expected value approach recommends Investment A, d. ✔ 20 (b) For the lottery having a payoff of $100,000 with probability p and $0 with probability (1-p), two decision makers expressed the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility approach. Indifference Probability (p) 45 45 0.15 Decision Maker A 6.95 X 0.6 0.35 Decision Maker B 0.2 Expected Utilities 0 20 Calculate the expected utility for each of the decision alternatives for each of the decision makers. (Assign a utility of 10 to the payoff of $100,000 and a utility of 0 to the payoff of $0.) 45 0.20 Enter a number. Decision Maker B

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Decision Alternative Up S₁ Stable s₂ Down S3
Investment A, d₁
Investment B, d₂
Investment C, d3
Probabilities
Profit
Investment A, d₂
Investment B, d₂
Investment C, dz
100
70
Economic Conditions
45
0.95
thousand
thousand
thousand
0.85
0.65
0.45
Profit Decision Maker A
$70,000
$45,000
$20,000
20
(a) Using the expected value approach, which decision is preferred?
E(d₂) $ 68
E(d₂) = $ 56.25
E(d3) = $45
The expected value approach recommends Investment A, d. ✔
Indifference Probability (p)
45
45
(b) For the lottery having a payoff of $100,000 with probability p and $0 with probability (1-p), two decision makers expressed
the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility
approach.
0.15
6.95 X
Decision Maker A
0.6
Decision Maker B
0.35
0.2
Expected Utilities
0
20
45
0.20
Calculate the expected utility for each of the decision alternatives for each of the decision makers. (Assign a utility of 10 to the
payoff of $100,000 and a utility of 0 to the payoff of $0.)
Enter a number.
Decision Maker B
presning
Transcribed Image Text:Decision Alternative Up S₁ Stable s₂ Down S3 Investment A, d₁ Investment B, d₂ Investment C, d3 Probabilities Profit Investment A, d₂ Investment B, d₂ Investment C, dz 100 70 Economic Conditions 45 0.95 thousand thousand thousand 0.85 0.65 0.45 Profit Decision Maker A $70,000 $45,000 $20,000 20 (a) Using the expected value approach, which decision is preferred? E(d₂) $ 68 E(d₂) = $ 56.25 E(d3) = $45 The expected value approach recommends Investment A, d. ✔ Indifference Probability (p) 45 45 (b) For the lottery having a payoff of $100,000 with probability p and $0 with probability (1-p), two decision makers expressed the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility approach. 0.15 6.95 X Decision Maker A 0.6 Decision Maker B 0.35 0.2 Expected Utilities 0 20 45 0.20 Calculate the expected utility for each of the decision alternatives for each of the decision makers. (Assign a utility of 10 to the payoff of $100,000 and a utility of 0 to the payoff of $0.) Enter a number. Decision Maker B presning
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