Which decision should paul make using the expected utility

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Reference no: EM13159130

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? Compare with the decision using the expected value approach.

Reference no: EM13159130

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