Let us return to the Texaco-Pennzoil example from Chapter 4 and think about Liedtke's risk attitude. Suppose that Liedtke's utility function is given by the utility function in Table 13.5. a Graph this utility function. Based on this graph, how would you classify Liedtke's at- titude toward risk? b Use the utility function in conjunction with the decision tree sketched in Figure 4.2 to solve Liedtke's problem. With these utilities, what strategy should he pursue? Should he still counteroffer $5 billion? What if Texaco counteroffers $3 billion? Is your an- swer consistent with your response to part a? c Based on this utility function, what is the least amount (approximately) that Liedtke should agree to in a settlement? (Hint: Find a sure amount that gives him the same ex- pected utility that he gets for going to court.) What does this suggest regarding plau- sible counteroffers that Liedtke might make?

Let us return to the Texaco-Pennzoil example from Chapter 4 and think about Liedtke's risk attitude. Suppose that Liedtke's utility function is given by the utility function in Table 13.5. a Graph this utility function. Based on this graph, how would you classify Liedtke's at- titude toward risk? b Use the utility function in conjunction with the decision tree sketched in Figure 4.2 to solve Liedtke's problem. With these utilities, what strategy should he pursue? Should he still counteroffer $5 billion? What if Texaco counteroffers $3 billion? Is your an- swer consistent with your response to part a? c Based on this utility function, what is the least amount (approximately) that Liedtke should agree to in a settlement? (Hint: Find a sure amount that gives him the same ex- pected utility that he gets for going to court.) What does this suggest regarding plau- sible counteroffers that Liedtke might make?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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