Consider Exercise 18.31. Find the expected utility of the oil well drilling operation. Find the expected utility of not investing. What should the decision maker do if he/she wishes to maximize expected utility?

Exercise 18.31

Suppose that a decision maker has the opportunity to invest in an oil well drilling operation that has a .3 chance of yielding a profit of $1,000,000, a .4 chance of yielding a profit of $400,000, and a .3 chance of yielding a profit of -$100,000. Also, suppose that the decision maker’s utilities for $400,000 and $0 are .9 and .7. Explain the meanings of these utilities.