I am so lost and confused, Help is much appericated! Below is the problem that I

Question

I am so lost and confused, Help is much appericated!

Below is the problem that I need help on:

Chez Paul is contemplating either opening another restaurant or expanding its existing location. The payoff table for these two decisions is:

s1

s2

s3

New Restaurant

-$80K

$20K

$160K

Expand

-$40K

$20K

$100K

Paul has calculated the indifference probability for the lottery having a payoff of $160K with probability p and -$80K with probability (1-p) as follows:

Amount Indifference Probability (p)

-$40K .4

$20K .7

$100K .9

a. Is Paul a risk avoider, a risk taker, or risk neutral? EXPLAIN.

b. Suppose Paul has defined the utility of -$80K to be 0 and the utility of $160K to be 80. What would be the utility values for -$40K, $20K, and $100K based on the indifference probabilities?

c. Suppose P(s1) = .4, P(s2) = .3, and P(s3) = .3. Which decision should Paul make using the expected utility approach?

d. Compare the result in part c with the decision using the expected value approach.

s1

s2

s3

New Restaurant

-$80K

$20K

$160K

Expand

-$40K

$20K

$100K

Explanation / Answer

I am also consfused, your question posted is not clear.

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