Question: The managers utility function for profit is U(p) = 10 ln(p), where p is the dollar amount of profit. The manager is considering a risky
The manager’s utility function for profit is U(p) = 10 ln(p), where p is the dollar amount of profit. The manager is considering a risky decision with the four possible profit outcomes shown below. The manager makes the following subjective assessments about the probability of each profit outcome:
| probability | Profit outcome Project A | Profit outcome Project B |
| 0.05 | $5,000 | $14,000 |
| 0.10 | $10,000 | $14,000 |
| 0.35 | $15,000 | $14,000 |
| 0.50 | $20,000 | $14,000 |
What is the expected profit of Project A and Project B?
What is the manager’s expected utility of profit for Project A and Project B?
If this manager is maximizing expected utility, which project will be chosen?
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To solve this problem well go through the following steps 1 Calculate the Expected Profit for both Project A and Project B 2 Calculate the Expected Ut... View full answer
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