For the lottery having a payoff of $100 000 with a probability p and $0 with a probability (1-p), two decision makers expressed the following indifference probabilities:
Profit Indifference probability (p)
Decision Maker A Decision Maker B
$75 000
$50 000
$25 000 0.80 0.60
0.60 0.30
0.30 0.15
(i) Find the most preferred decision for each decision maker using the expected utility approach.
(ii) Calculate and interpret decision maker A's risk premium for a payoff of $50 000
(c) Why don't decision makers A and B select the same decisio