A restaurant owner is contemplating either opening another restaurant or expanding its existing location. The payoff table for these two decisions is as follows.

State of Nature

Decision

s$1$

s$2$

s$3$

New restaurant $$$$80,000$ $$20,000$ $$160,000$

Expand $$$$40,000$ $$20,000$ $$100,000$

The owner has calculated the indifference probability for the lottery having a payoff of $$160,000$ with probability p and $$$$80,000$ with probability

$(1$ p$)$

as shown in the following table.

Amount Indifference Probability $($p$)$

$$$$40,0000\mathrm{.}43$

$$20,0000\mathrm{.}68$

$$100,0000\mathrm{.}91$

$($a$)$

Is the restaurant owner a risk avoider, a risk taker, or risk neutral?

a risk avoider

a risk taker

a risk neutral

$($b$)$

Suppose they have defined the utility of $$$$80,000$ to be $0$ and the utility of $$160,000$ to be $80.$ What would be the utility values for $$$$40,000,$ $$20,000,$ and $$100,000$ based on the indifference probabilities?

Payoffs Utilities

$$160,00080$

$$100,000$

$$20,000$

$$$$40,000$

$$$$80,0000$

$($c$)$

Suppose

P$($s$1)=0\mathrm{.}4,$

P$($s$2)=0\mathrm{.}3,$

and

P$($s$3)=0\mathrm{.}3.$

Which decision should the owner make? Compare with the decision using the expected value approach.

Based on the expected utility, the restaurant should

$---$Select$---$

$.$ Based on the expected value, the restaurant should

$---$Select$---$

$.$