Problem: A manager must determine which of two products to market. From market studies the manager constructed the following payoff matrix of the present value of all future net profits under all the different possible states of the economy:
|
State of the Economy
|
Probability
|
Profit
|
|
Product 1
|
|
|
|
Boom
|
0.2
|
$50
|
|
Normal
|
0.5
|
20
|
|
Recession
|
0.3
|
0
|
|
Product 2
|
|
|
|
Boom
|
0.2
|
$30
|
|
Normal
|
0.4
|
20
|
|
Recession
|
0.4
|
10
|
The manager’s utility for money function is
U = 100M – M2
I do not understand if I should be using the formula: Expected value of money = E(M)
Expected utility = E(U)
And I am not sure how to the use the highlighted equation.
where M refers to dollars of profit. (a) Is the manager a risk seeker, risk neutral, or risk averter? Why?