For the payoff table below, the decision maker will use P(s1)=.15; P(s2)=.5; P(s
ID: 2978326 • Letter: F
Question
For the payoff table below, the decision maker will use P(s1)=.15; P(s2)=.5; P(s3)=.35 STATE OF NATURE Decision s1 s2 s3 d1 -5000 1,000 10,000 d2 -15,000 -2,000 40,000 a. what alternative would be chosen according to expected value? b. for a lottery having a payoff of 40,000 with probability p and -15,000, with probability (1-p), the decision maker expressed the following indifference probabilities. Payoff Probability 10,000 .85 1000 .60 -2000 .53 -5000 .50 Let U(40,000)=10 and U(-15,000)=0 and find the utility value for each payoff. c. what alternative would be chosen according to expected utility?Explanation / Answer
alternate1=(.15*-5000)+(.5*1000)+(.35*10000)=3500 Alternate2=(.15*-15000)+(.5*-2000)+(.35*40000)=10,750 assuming U(40,000) = 10 and U(-15,000) = 0 certain payoff is U(M)=[p*(max payoff]+[(1-p)*U(min payoff)] U(10,000)=[.85*10]+[(1-.85)*0] = 8. Utility value of 10,000 would be 8.5 The Utility Value of 1,000 would be 6 The Utility Value of -2,000 would be 5.3 The Utility Value of -5,000 would be 5 c)8.5