d. What is Gorman's optimal decision strategy?

. What is the expected value of the market research information?

19. Investment Alternatives. A firm has three investment alternatives. Payoffs are in thousands of dollars. Decision Alternative

Up, s,

Investment A, d,

100

Investment B, d,

75

Investment C, d,

50

Probabilities

0.40

Economic Conditions

Stable, 5,

25

50

50

0.30

Down, sy

0

25

50

0.30

Using the expected value approach, which decision is preferred?

For the lottery having a payoff of $100,000 with probability p and SO with probability (1 - p), two decision makers expressed the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility approach. Profit $75,000 $50.000 $25,000

Indifference Probability (p)

Decision Maker A

Decision Maker B

0.80

0.60

0.60

0.30

0.30

0.15

c. Why don't decision makers A and B select the same decision alternative?

20. Insurance Policy for New Office Building. Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries doesn't purchase the insurance and minor fire damage occurs, a cost of $100,000 is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including the state-of-nature probabilities, are as follows: Decision Alternative Purchase insurance, di Do not purchase insurance, d, Probabilities

None, s,

10,000

0

0.96

Damage

Minor, sa

10,000

100,000

0.03

Major, s,

10,000

200,000

0.01

Using the expected value approach, what decision do you recommend?

What lottery would you use to assess utilities? (Note: Because the data are costs, the best payoff is $0.)

Assume that you found the following indifference probabilities for the lottery defined in part (b). What decision would you recommend?