Explain which decision should he make using the expected utility approach?
Chez Paul is anticipating 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
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$20K
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$100K
|
Paul has computed the indifference probability for the lottery having a payoff of $160K with probability p and -$80K with probability (1-p) as follows:
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Amount
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Indifference Probability (p)
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-$40K
|
.4
|
|
$20K
|
.7
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$100K
|
.9
|
Presume P(s1) = .4, P(s2) = .3, and P(s3) = .3. Which decision must Paul make using the expected utility approach?