Question: A new product has the following profit projections and associated probabilities:

Profit Probability

$150,000 .10

$100,000 .25

$ 50,000 .20

0 .15

-$50,000 .20

-$100,000 .10

a. Use the expected value approach to decided whether to market the new product.

b. Because of the 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?

c. 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 .95

$ 50,000 .70

0 .50

-$50,000 .25

d. Use expected utility to make a recommended decision.

e. Should decision maker feel comfortable with the final decision recommended by the analysis?