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

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.

I know that EV (d1) = 10000 (0.96) + 10000 (0.03) + 10, 000 (0.01) = 10, 000 and EV (d2) = 0 (0.96) + 100, 000 (0.03) + 200, 000 (0.01) = 5000

I also know the best outcome is 0 and the worst is -200,000

and 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

BUT how do you actually get the utility for 10,000 and 100,000? i.e. what do you use in the above formula to get the utilitys for 10,000 and 100,000?

None Minor Major Decision Alternative s1 s2 s3 Purchase insurance, d1 10,000 10,000 10,000 Do not purchase insurance, d2 0 100,000 200,000 Probabilities 0.96 0.03 0.01

Explanation / Answer

answer:

given data:

here, if you used these formula,the output final result is as sames in the utilites of $200000, so thats why the formula no used for the above utility calculation.

zero$(0)

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