I am confused on how to actually find the utility can someone help me? Alexander

Question

I am confused on how to actually find the utility can someone help me?

Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries doesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000 is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including the state-of-nature probabilities, are as follows:

What lottery would you use to assess utilities? (Note: Because the data are costs, the best payoff is $0.) Round your answer in one decimal place.

Explanation / Answer

Expected value of each decision alternatives are

EV(d1) = 10,000(0.96)+10000(0.03)+10,000(0.01)=10,000

EV(d2) =0(0.96)+100,000(0.03)+200,000(0.01)= 5,000

so d2 is the best expected decision

(b) The best outcome is 0, the worst -200,000, Lottery: probability p for 0, and (1-p) for 200,000 Expected value for lottery is 0p +200,000 (1-p)= 200,000-200,000p

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