Compute the utility for the pay off and give a summary.
Chez Paul is contemplating either opening another restaurant or expanding its existing location. The payoff table for these two decisions is:
|
|
s1
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s2
|
s3
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New Restaurant
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-$80K
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$20K
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$160K
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|
Expand
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-$40K
|
$20K
|
$100K
|
Paul has calculated the indifference likelihood for the lottery having a payoff of $160K with probability p and -$80K with possibility (1-p) as follows:
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Amount
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Indifference Probability(p)
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-$40K
|
.4
|
|
$20K
|
.7
|
|
$100K
|
.9
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Is Paul a risk avoider, a risk taker, or risk neutral? Give explanation.