Share
Explore BrainMass

# Probability/Utility

You have a person whose utility is U = Square root of I. They have two choices: A. Vote for action B. Vote against action. If they choose B. They get \$5 Million. If they choose A. they have a 30% chance of making \$80 million and 70% chance of making \$1 million. So far so good.

But if they make the \$80 million, there is a possibility they will loose \$10 million of it. The question is what's the maximum probability of that last last thing happening (-\$10 million) that will induce the person to vote for action?

So, the way I did it was just EU(sr \$5million) = .7EU(sr \$1million) + .3EU(sr \$80million) - p(sr \$10mill). Where "sr" square root. That gave me a max of 36% probability.

*What I'm confused about is that there is only a 30% chance of facing the probability of -\$10,000 so it doesn't seem like it should receive the same weight as the \$80mill and \$1mill ? Its like a chance of a chance. But when I did .3 * p(sr \$10million) it gave me a probably greater than 100% which I know was wrong.

#### Solution Preview

We know that the maximum probability of that last thing happening will make the person

indifferent in choosing A and B.
Thus, ...

#### Solution Summary

The solution answers the question(s) below.

\$2.19