Find the alternative would be selected according to expected value and utility.
For the payoff table below the decision maker will use P (s1) = .15, P (s2) = .5, and P (s3) = .35.
|
s1
|
s2
|
s3
|
|
d1
|
-5000
|
1000
|
10,000
|
|
d2
|
-15,000
|
-2000
|
40,000
|
1) Explain what alternative would be chosen according to expected value?
2) For the lottery having a payoff of 40000 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 also find the utility value for each payoff.
c. Explain what alternative would be chosen according to expected utility?