Exhibit 21-2
Below you are given a payoff table involving three states of nature and two decision alternatives. The probability that S 1 will occur is 0.1; the probability that S 2 will occur is 0.6.
-Refer to Exhibit 21-2. The recommended decision based on the expected value criterion is
A)A
B)B
C)Both alternatives are the same.
D)None of these alternatives is correct.

Question

Exhibit 21-2
Below you are given a payoff table involving three states of nature and two decision alternatives.  The probability that S 1 will occur is 0.1; the probability that S 2 will occur is 0.6.
-Refer to Exhibit 21-2. The recommended decision based on the expected value criterion is
A)A 
B)B 
C)Both alternatives are the same. 
D)None of these alternatives is correct.

Quizplus · Accepted Answer

To calculate the expected value for each decision alternative, we multiply each payoff by its corresponding probability and then sum up the results.

For alternative A: 
Expected value = (100 * 0.1) + (400 * 0.6) + (600 * 0.3) = 360

For alternative B: 
Expected value = (300 * 0.1) + (200 * 0.6) + (100 * 0.3) = 170

Therefore, based on the expected value criterion, alternative B is the recommended decision.

Exhibit 21-2 Below You Are Given a Payoff Table Involving Three States