Assignment:
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?
Provide complete and step by step solution for the question and show calculations and use formulas.