# A new product has the following profit projections and associated pr.pdf

A

A new product has the following profit projections and associated probabilities: Profit Probability \$150,000 0.10 \$100,000 0.25 \$ 50,000 0.20 \$ 0 0.15 \$ -50,000 0.20 \$ -100,000 0.10 1. Because of 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? 2. 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 0.95 \$ 50,000 0.70 \$ 0 0.50 \$ -50,000 0.25 3. Use the expected utility to make a recommended decision. 4. Should the decision maker feel comfortable with the final decision recommended by the analysis? Solution a) Expected Value Approach :- 150000*0.1+100000*0.25+50000*0.2+0*0.15+50000*0.2+100000*0.1 =70000 (b) Profit Indifference Probability ; 100000*0.95+50000*0.70+0*0.50-50000*0.25= 117500 (c) Lottery value is 70000 (d) No.

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### A new product has the following profit projections and associated pr.pdf

• 1. A new product has the following profit projections and associated probabilities: Profit Probability \$150,000 0.10 \$100,000 0.25 \$ 50,000 0.20 \$ 0 0.15 \$ -50,000 0.20 \$ -100,000 0.10 1. Because of 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? 2. 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 0.95 \$ 50,000 0.70 \$ 0 0.50 \$ -50,000 0.25 3. Use the expected utility to make a recommended decision. 4. Should the decision maker feel comfortable with the final decision recommended by the analysis? Solution a) Expected Value Approach :- 150000*0.1+100000*0.25+50000*0.2+0*0.15+50000*0.2+100000*0.1 =70000 (b) Profit Indifference Probability ; 100000*0.95+50000*0.70+0*0.50-50000*0.25= 117500 (c) Lottery value is 70000 (d) No
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