A new product has the following profit projections and associated probabilities:
Profit Probability
$150,000 ....... 0.10
$100,000 ........ 0.25
$ 50,000 ....... 0.20
0 ....... 0.15
-$ 50,000 ....... 0.20
-$100,000 ....... 0.10
a. Use the expected value approach to decide whether to market the new product.
b. Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery?
c. Assume that the following indifference probabilities are assigned. Do the utilities reflect the behavior of a risk taker or a risk avoider?
Indifference
Profit Probability (p)
$100,000...... 0.95
$ 50,000 ...... 0.70
0 ...... 0.50
-$ 50,000 ...... 0.25
d. Use expected utility to make a recommended decision.
e. Should the decision maker feel comfortable with the final decision recommended by the analysis?