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StatisticsQ&A Library#1. A firm has three investment alternatives. Pay offs are in thousands of dollars.U(100)=10 and U(0)=0Economic 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 0.15j. What is the expected utility of d1 for decision maker B?k. What is the expected utility of d2 for decision maker B?l. What is the expected utility of d3 for decision maker B?Question

Asked Nov 9, 2019

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#1. A firm has three investment alternatives. Pay offs are in thousands of dollars.

U(100)=10 and U(0)=0

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

j. What is the expected utility of d1 for decision maker B?

k. What is the expected utility of d2 for decision maker B?

l. What is the expected utility of d3 for decision maker B?

Step 1

i.

The expected utility of d1 for decision maker B is ** 0.445** and it is obtained below:

From the given information, U(100)=10 and U(0)=0. The probabilities are 0.4, 0.3 and 0.3.

For decision maker B, the indifference probabilities are 0.60, 0.30 and 0.15.

Step 2

j.

The expected utility of d2 for decision maker B is **0.3...**

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