Exam 12: Decision Making Under Uncertainty

A chemical company is in the process of studying two long-term plans.The first plan involves expansion of their industrial division.The second plan emphasizes expansion in the business of consumer pharmaceuticals.Market research reveals the following (preliminary)results (returns are in $ millions): The planning committee has the (risk averse)utility function U = 10M - 0.05M2.Discuss the long-term planning decision based on the preliminary predictions and the given utility function:

A manager who sets U($20,0000)= 20,U($40,000)= 40,U($60,000)= 70 (where "U( )" stands for the utility at the particular outcome)has a utility function that:

You are the chief appraiser for a large art dealer in a major American city.You are offered a chance to examine,and buy,a work of art.You have reason to believe that it is a piece from a famous artist of the 15th century that has been lost to the art world for hundreds of years.Such a painting would have an estimated market value of $1 million.However,you face two risks.First,the painting may be a forgery,a chance that you estimate to be 0.4.Second,even if the painting is authentic it may be stolen.Once you buy the painting,you bear all risk.If it is a fake,its value is $0.If it proves to be stolen (a 0.2 risk in your estimation),you must return the painting to its rightful owner and you cannot recover the purchase price. (a)You have the chance to buy the painting for $500,000.As a risk-neutral decision maker,should you make the purchase?

Given the opportunity,a rational decision-maker should always select the alternative with the:

A firm might be liable for $10 million if a lawsuit is brought against it.The firm judges that the probability that the suit will be brought is 0.6.In addition,it believes that its chance of winning such a suit (in which case it owes $0)is 0.7.The firm's overall expected liability is:

A convenient way to represent decisions,chance events,and possible outcomes in choices under risk and uncertainty is known as the:

If a decision is made on the basis of expected utility,which of the two investments,investment R and investment C,should the decision-maker choose?