Chez Paul is contemplating either opening another restaurant or expanding its existing location. The payoff table for these two decisions is:

s1 s2 s3
New Restaurant -$80K $20K $160K
Expand -$40K $20K $100K

Paul has calculated the indifference probability for the lottery having a payoff of $160K with probability p and -$80K with probability (1-p) as follows:

Amount Indifference Probability (p)
-$40K .4
$20K .7
$100K .9

a. Is Paul a risk avoider, a risk taker, or risk neutral? EXPLAIN.

b. Suppose Paul has defined the utility of -$80K to be 0 and the utility of $160K to be 80. What would be the utility values for -$40K, $20K, and $100K based on the indifference probabilities?

c. Suppose P(s1) = .4, P(s2) = .3, and P(s3) = .3. Which decision should Paul make using the expected utility approach?

d. Compare the result in part c with the decision using the expected value approach.