Chez Paul Is Contemplating Either Opening Another Restaurant or Expanding

question 50

Essay

Chez Paul is contemplating either opening another restaurant or expanding its existing location.The payoff table for these two decisions is as follows:
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Paul 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 follows:
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a.Is Paul a risk avoider,a risk taker,or risk neutral?
b.Suppose Paul has 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?
c.Suppose P(s₁)= 0.4,P(s₂)= 0.3,and P(s₃)= 0.3.Which decision should Paul make? Compare with the decision using the expected value approach.
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Definitions:

Self-Actualization

The embodiment or reaching of an individual's innate talents and potential, considered an innate longing or necessity in every person.

Unique Potential

An individual's inherent capacities and abilities that distinguish them from others.

Needs Hierarchy

A psychological theory proposing that human needs are arranged in a hierarchical order, with physical needs at the base and self-actualization needs at the top.

Social Animal

An organism that highly engages in social behaviors and interactions, relying on group cooperation for survival and well-being.