The following is a payoff table giving profits for various situations. States of

Question

The following is a payoff table giving profits for various situations. States of Nature Alternatives A B C Alternative 1 100 120 180 Alternative 2 120 140 120 The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. Calculate the expected values for both alternatives. What alternative would be chosen according to expected value? For a lottery having payoffs of 200 with probability p and-100 with probability (1-p), the decision maker expressed the following indifference probabilities. Payoff Probability 200 .99 180 .95 140 .90 120 .87 100 .84 50 .75 -100 .50 Calculate the Expected Utility for both alternatives What alternative would be chosen according to expected utility?

Explanation / Answer

For the Alternative 1: the Expected Utility is 126 alternative C would be chosen according to expected utility because it has the highest utility.

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