You are given the following payoff table:

(a) Assume that your utility function for the payoffs is U(x) = ˆšx. Plot the expected utility of each alternative versus the value of p on the same graph. For each alternative, find the range of values of p over which this alternative maximizes the expected utility.
(b) Now assume that your utility function is the exponential utility function with a risk tolerance of R = 50. Use ASPE to construct and solve the resulting decision tree in turn for p = 0.25, p = 0.5, and p = 0.75.

Transcribed Image Text:

State of Nature S1 S2 Alternative A1 A2 25 100 36 0 49 1 -p Prior probability