# Could someone check my answer. expected value a utility

• Feb 6th 2008, 04:30 PM
jwells1999
Could someone check my answer. expected value a utility
For the payoff table below, the decision maker will use P(s1) = .15, P(s2) = .5, and P(s3) = .35.

s1 s2 s3
d1 -5000 1000 10,000
d2 -15,000 -2000 40,000

a. (15 pts) What alternative would be chosen according to expected value?

First you have to figure out the expected monetary value so you would do the following calculations…
D1=(.15*-5000)+(.5*1000)+(.35*10000)=3500
D2=(.15*-15000)+(.5*-2000)+(.35*40000)=10,750
If you choose the best alternative with the highest expected value or payout, the answer would be d2.

b. (10 pts) 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
1000 .60
-2000 .53
-5000 .50

Let U(40,000) = 10 and U(-15,000) = 0 and find the utility value for each payoff.

The formula for finding the utility value of a certain payoff is U(M)=[p*(max payoff]+[(1-p)*U(min payoff)]