Consider the Following Problem with Four States of Nature,three Decision

question 14

Essay

Consider the following problem with four states of nature,three decision alternatives,and the following payoff table (in $s):
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The indifference probabilities for three individuals are as follows:
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a.Classify each person as a risk avoider,risk taker,or risk neutral.
b.For the payoff of $400,what premium will the risk avoider pay to avoid risk? What premium will the risk taker pay to have the opportunity of the high payoff?
c.Suppose each state is equally likely.What are the optimal decisions for each of these three people?
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Definitions:

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return, used in discounting to assess investment opportunities.

Per Year

A term used to specify the occurrence or calculation of something on an annual basis.

Reward Program

A program offered by a company to customers who frequently make purchases, designed to encourage ongoing business by offering benefits or rewards.

Employee

Individual hired by a company or another person to conduct tasks, services or jobs for compensation.