A new product has the following profit projections and associated probabilities: ProfitProbability$150,0000.10$100,0000.25$ 50,0000.20$00.15-$ 50,0000.20-$100,0000.10 Use the expected value approach to decide whether to market the new product. Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery? Assume that the following indifference probabilities are assigned. Do the utilities reflect the behavior of a risk taker or a risk avoider? ProfitIndifference Probability$100,0000.95$ 50,0000.70$00.50-$ 50,0000.25

The expected value is the arithmetic mean of the random variables which is weighted by their…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A new product has the following profit projections and associated probabilities:

Profit	Probability
$150,000	0.10
$100,000	0.25
$ 50,000	0.20
$0	0.15
-$ 50,000	0.20
-$100,000	0.10

Use the expected value approach to decide whether to market the new product.
Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery?
Assume that the following indifference probabilities are assigned. Do the utilities reflect the behavior of a risk taker or a risk avoider?

Profit	Indifference Probability
$100,000	0.95
$ 50,000	0.70
$0	0.50
-$ 50,000	0.25

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