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

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

Problem 1QTC

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