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:
 
o  the indifference probability for -$40,000 is 0.4
o  the indifference probability for  $20,000 is 0.7
o  the indifference probability for $100,000 is 0.9
 
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.

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Request for Question Clarification by scriptor-ga on 30 Oct 2005 16:14 PST

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Regards,
Scriptor