The following is a payoff table giving profits for various situations. If a person selected Alternative 1, what would the expected profit be?
A)51.7
B)54.7
C)55.0
D)57.3

Question

The following is a payoff table giving profits for various situations.  If a person selected Alternative 1, what would the expected profit be?
A)51.7 
B)54.7 
C)55.0 
D)57.3

Quizplus · Accepted Answer

To calculate the expected profit for Alternative 1, we need to multiply each outcome by its probability and sum them up.

Expected profit for Alternative 1 = (0.3 x 60) + (0.4 x 45) + (0.2 x 30) + (0.1 x 15) = 18 + 18 + 6 + 1.5 = 43.5

Therefore, the expected profit for Alternative 1 is $43.5.

The best choice depends on the decision maker's attitude towards risk.

If the decision maker is risk-averse (i.e., dislikes risk), they would choose Alternative 2 since it has the highest guaranteed payoff of $50.

If the decision maker is risk-neutral (i.e., is indifferent towards risk), they would choose Alternative 1 since it has the highest expected profit of $43.5.

If the decision maker is risk-seeking (i.e., enjoys risk), they would choose Alternative 3 since it has the highest potential payoff of $100.

The Following Is a Payoff Table Giving Profits for Various