Question

16. A manager has to decide whether to launch product A or B. Product A has a 0.4 probability of producing a return of $2 million over the next year and a 0.6 probability of yielding a return of $0. It is thought that product B will certainly yield a return of $1.2 million over the next year. The manager's utilities for the returns of $0, $1.2 million and $2 million are 0, 0.7, and 1.0, respectively. Which of these statements is correct? A) The EMV and the expected utility criteria suggest that different products should be launched B) of the two products, product A has the lowest expected utility of O OC) of the two products, product A has the lowest expected utility of 0.4 D) Of the two products, product A has the highest expected monetary payoff of $0.8 million 17. According to behavioral decision research, choices involving statements about gains: A) Tend to produce risk-averse responses B) Tend to produce risk-seeking responses C) Tend to produce risk-neutral responses D) Tend to produce less accurate responses than those involving losses

Answer 1

Due to presence of HOMEWORKLIB POLICY, I am providing solution to one question only.

16.

Product A provides $2 million (utility 1) with probability 0.4 and $0 (utility 0) with probability 0.6.

Expected utility in product A = 0.4 X 1 + 0.6 X 0 = 0.4

Product B provides certain return of $1.2 million (utility 0.7)

Expected utility in product B = 0.7

This shows that Product A has lower expected utility than product B.

Ans(c): Of the two products, product A has lowest expected utility of 0.4.