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
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?