A new product has the following profit projections and
associated probabilities:
Profit Probability
$150,000 .10
$100,000 .25
$ 50,000 .20
0 .15
-$50,000 .20
-$100,000 .10
a. Use the expected value approach to decide whether to market the
new product.
b. Because of the high dollar values involved, especially the
possibility of a $100,000 loss, the marketing vice president has
expressed some concern about the use of the expected value
approach. As a consequence, if a utility analysis is performed,
what is the appropriate lottery?
c. Assume that the following indifference probabilities are
assigned. Do the utilities reflect the behavior of a risk taker or
a risk avoider?
Profit Indifference Probability
$100,000 .95
$ 50,000 .70
0 .50
-$50,000 .25
d. Use expected utility to make a recommended decision.
e. Should decision maker feel comfortable with the final decision
recommended by the analysis?