A Risk-Averse Decision Maker Is Trying to Decide Which Alternative

question 57

Multiple Choice

A risk-averse decision maker is trying to decide which alternative to choose. The payoff table for the alternatives, given two possible states of nature, is shown below. Assuming that the decision makers risk tolerance (R) is 5, which decision should she choose based on the utility of each outcome? Assume the exponential utility function is applicable.
$$\begin{array} { | l | r | r | } \hline { \text { Alternative } } & \text { High } & { \text { Low } } \\\hline \text { A } & 20 & 5 \\\hline \mathrm { B } & 25 & 11 \\\hline \mathrm { C } & 30 & 15 \\\hline \mathrm { D } & 10 & 12 \\\hline \mathrm { E } & 50 & - 28 \\\hline \text { Prior Probability } & 0.3 & 0.7 \\\hline\end{array}$$

• A) Alternative A
• B) Alternative B
• C) Alternative C
• D) Alternative D
• E) Alternative E

---

Definitions:

Accounts Receivable

Funds that customers owe to a company for products or services already provided but not yet compensated.

Sales Revenue

The total income received by a company from its sales of goods or services, before any expenses are subtracted.

Prepaid Expenses

Costs for goods or services that are paid for in advance of being used or consumed, recognized as assets on a balance sheet.

Income Statement

A financial statement that reports a company's financial performance over a specific accounting period, detailing revenues, expenses, and net income.