For the payoff table below, the decision maker will use P(s1) = .15, P(s2) = .5, and P(s3) = .35.
State of Nature
|
Decision
|
s1
|
s2
|
s3
|
|
d1
|
-5,000
|
1,000
|
10,000
|
|
d2
|
-15,000
|
-2,000
|
40,000
|
a. Calculate the expected values of all alternatives. What alternative would be chosen according to expected value?
b. For a lottery having a payoff of 40,000 with probability p and -15,000 with probability (1-p), the decision maker expressed the following indifference probabilities.
|
Payoff
|
Probability
|
|
10,000
|
.85
|
|
1,000
|
.60
|
|
-2,000
|
.53
|
|
-5,000
|
.50
|
c.
Calculate the Expected Utility for all alternatives
d. What alternative would be chosen according to expected utility?