Three decision makers have assessed utilities for the following decision problem (payoffin dollars):The indifference probabilities are as follows:a. Plot the utility function for money for each decision maker. Indifference Probability (p)PayoffDecision Maker ADecision Maker BDecision Maker C1001.001.001.00800.950.700.900.900.70500.600.75200.450.60-200.500.250.40- 1000.000.000.00 State of NatureDecision AlternativeS1S2S3did,2050-2080100- 100

a) Payoff Decision maker A Decision maker B Decision maker C -100 0 0 0 -20 0.5 0.25 0.4 20…

Indifference Probability (p) Payoff Decision Maker A Decision Maker B Decision Maker C 100 1.00 1.00 1.00 80 0.95 0.70 0.90 0.90 0.70 50 0.60 0.75 20 0.45 0.60 -20 0.50 0.25 0.40 - 100 0.00 0.00 0.00 State of Nature Decision Alternative S1 S2 S3 di d, 20 50 -20 80 100 - 100

Indifference Probability (p) Payoff Decision Maker A Decision Maker B Decision Maker C 100 1.00 1.00 1.00 80 0.95 0.70 0.90 0.90 0.70 50 0.60 0.75 20 0.45 0.60 -20 0.50 0.25 0.40 - 100 0.00 0.00 0.00 State of Nature Decision Alternative S1 S2 S3 di d, 20 50 -20 80 100 - 100

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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Question

Three decision makers have assessed utilities for the following decision problem (payoff
in dollars):

The indifference probabilities are as follows:

a. Plot the utility function for money for each decision maker.

Indifference Probability (p)
Payoff
Decision Maker A
Decision Maker B
Decision Maker C
100
1.00
1.00
1.00
80
0.95
0.70
0.90
0.90
0.70
50
0.60
0.75
20
0.45
0.60
-20
0.50
0.25
0.40
- 100
0.00
0.00
0.00

State of Nature
Decision Alternative
S1
S2
S3
di
d,
20
50
-20
80
100
- 100

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