#1. A firm has three investment alternatives. Pay offs are in thousands of dollars.                                                                                                      Economic ConditionsDecision Alternatives                                                           Up, s1          Stable, s2           Down, S3Investment A, d1                                                                  100                   25                          0Investment B, d2                                                                    75                    50                        25Investment C, d3                                                                    50                    50                        50Probabilities                                                                        0.40                  0.30                      0.30                                                                                              Indifference Probability (p)Profit                                                                       Decision Maker A                   Decision Maker B$75,000                                                                             0.80                                      0.60$50,000                                                                             0.60                                      0.30$25,000                                                                             0.30                                      0.15a. What is the utility of a payoff of 75 for decision maker A?b. What is the utility of a payoff of 50 for decision maker A?c. What is the utility of a payoff of 25 for decision maker A?

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Asked Nov 8, 2019
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#1. A firm has three investment alternatives. Pay offs are in thousands of dollars.
                                                                                                      Economic Conditions
Decision Alternatives                                                           Up, s1          Stable, s2           Down, S3
Investment A, d1                                                                  100                   25                          0
Investment B, d2                                                                    75                    50                        25
Investment C, d3                                                                    50                    50                        50
Probabilities                                                                        0.40                  0.30                      0.30

                                                                                              Indifference Probability (p)
Profit                                                                       Decision Maker A                   Decision Maker B
$75,000                                                                             0.80                                      0.60
$50,000                                                                             0.60                                      0.30
$25,000                                                                             0.30                                      0.15

a. What is the utility of a payoff of 75 for decision maker A?
b. What is the utility of a payoff of 50 for decision maker A?
c. What is the utility of a payoff of 25 for decision maker A?

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Expert Answer

Step 1

1.

 

a.

 

The utility of a payoff of 75 for decision maker A is 100 and it is obtained below:

 

The probability value for 75 and A is 0.80.

Payoff (100x 0.80) +(25x 0.80) +(0x0.80)
100
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Payoff (100x 0.80) +(25x 0.80) +(0x0.80) 100

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Step 2

b.

 

The utility of a payoff of 50 for decision maker A is 100 and it is obtained below:

...
Payoff (100x 0.60) +(25x 0.60) +(0x0.60)
=75
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Payoff (100x 0.60) +(25x 0.60) +(0x0.60) =75

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