Purchase Solution

Calculating expected profit and utility values

Not what you're looking for?

Ask Custom Question

An individual is considering two investment projects. Project A will return a zero profit if conditions are poor, a profit of $4 if conditions are good, and a profit of $8 if conditions are excellent. Project B will return a profit of $2 if conditions are poor. a profit of $3 if conditions are good, and a profit of $4 if conditions are excellent. The probability distribution of conditions is as follows:

Conditions: Poor Good Excellent
Probability 40% 50% 10%

a) Using excel, calculate the expected value of each project and identify the preferred project according to this criterion.

b) Assume that the individual's utility function for profit is U(X) = X -0.05X2. Calculate the expected utility of each project and identify the preferred project according to this criterion.

c) Is this individual risk averse, risk neutral, or risk seeking? Why?

Purchase this Solution
Solution Summary

Solution depicts the steps to estimate the expected value and expected utility for each of the given projects. It also predicts the nature of the individual based upon the calculated values.

Solution Preview

Please refer attached file for better clarity of formulas and tables.

a) Using excel, calculate the expected value of each project and identify the preferred project according to this criterion. 

Project A
State / Probability Profit
Condition p X p*X
Poor 0.4 $0.00 $0.00
Good 0.5 $4.00 $2.00
Excellent 0.1 $8.00 $0.80
Expected profit $2.80

Project B
State / Probability Profit
Condition p X p*X
Poor ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

View More Free Quizzes
Related BrainMass Solutions

  • Product expected value approach-expected utility

    450609 Product expected value approach-expected utility A new product has the following profit projections and associated probabilities: Profit Probability $150,000 0.10 $100,000

  • Quantitative Methods and Decsion Making : Expected Values and Expected Utility

    Decsion-Making, Expected Values and Expected Utility are investigated. The solution is detailed and well presented.

  • Economics and shareholders

    BAD DRIVERS: Probability of crash 30% 30% 30% Cost of Insurance $0 $90.00 $5.00 Expected Utility(EU) =0.3*100^0.5+0.7*400^0.5=17 =0.3*(400-90)^0.5 + 0.7*(400-90)^0.5 =17.61 =0.3*(100+50-5)^0.5 + 0.7*(400-5)^0.5=17.52 Expected Profit(

  • Payoff problem/expected value decision alternatives

    occurs = (1/38)*$0 + (37/38)*$0 = 0 The expected values of bet and do not bet are negative and zero, respectively.

  • Term Break-Even Analysis

    Then subtract the expected fixed costs from the gross margin to arrive at the projected profit.

  • Risk Taker or Risk Aversion

    where M refers to dollars of profit. (a) Is the manager a risk seeker, risk neutral, or risk averter? Why? dU/dM=100-2M d2U/dM2 = -2 The expected utility will first increase with increasing wealth, attain a maximum and then decrease.

  • utility function

    322987 Utility Function and Expected Profit A manager has a utility function U = C 0.5 if she does not work hard and U = C 0.5 - 3 if she does. Expected profit will increase from 1,000 to 1,500 if she works hard.

  • Utility Analysis

    Expected Present Worth Profit or Loss (in millions) 24 3 8 10 15 20 25 30 40 50 Utility 0 .30 .40 .45 .50 .55 .65 .75 .85 1.0 Please see the attached file

  • Quantitative Methods

    , loss and risk, payoffs are replaced by: a. utility values b. multicriteria measures c. sample information d. opportunity loss I have made a an guide to help better give you an understanding on the questions asked above.

View More Related Solutions