Use the expected value approach to decide whether to market the new product. Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery? Assume that the following indifference probabilities are assigned. Do the utilities reflect the behavior of a risk taker or a risk avoider?
Use the expected value approach to decide whether to market the new product. Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery? Assume that the following indifference probabilities are assigned. Do the utilities reflect the behavior of a risk taker or a risk avoider?
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter2: Fundamental Economic Concepts
Section: Chapter Questions
Problem 7E
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Question
- A new product has the following profit projections and associated probabilities:
Profit |
Probability |
$150,000 |
0.10 |
$100,000 |
0.25 |
$ 50,000 |
0.20 |
$0 |
0.15 |
-$ 50,000 |
0.20 |
-$100,000 |
0.10 |
- Use the expected value approach to decide whether to market the new product.
- Because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery?
- Assume that the following indifference probabilities are assigned. Do the utilities reflect the behavior of a risk taker or a risk avoider?
Profit |
Indifference Probability |
$100,000 |
0.95 |
$ 50,000 |
0.70 |
$0 |
0.50 |
-$ 50,000 |
0.25 |
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