For the Payoff Table Below,the Decision Maker Will Use P(s₁)=

question 42

Essay

For the payoff table below,the decision maker will use P(s₁)= .15,P(s₂)= .5,and P(s₃)= .35.

a.What alternative would be chosen according to expected value?
b.For a lottery having a payoff of 40,000 with probability p and -15,000 with probability (1-p),the decision maker expressed the following indifference probabilities.

Let U(40,000)= 10 and U(-15,000)= 0 and find the utility value for each payoff.
c.What alternative would be chosen according to expected utility?

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Definitions:

Derivative Security

A financial security whose value is dependent upon or derived from one or more underlying assets.

Hedging

Reducing a firm’s exposure to price or rate fluctuations. Also immunization.

Economic Exposure

The risk that a company's cash flow, earnings, or future value will be affected by changes in exchange rates.

May Coffee Futures

Agreements that bind the purchaser to buy, and the seller to sell coffee, at an agreed price and date in the future.