The Maxwell School

Syracuse University

Syracuse University

The manager of a small nonprofit is two actions for helping the organization's target population. Action C is a conventional approach and action N is a newer option that's riskier. Both policies cost $100,000 and have either high (H) or low (L) gross payoffs. However, the payoffs and probabilities differ:

Action | State | Probability | Gross Payoff |
---|---|---|---|

C |
H | 75% | $220,000 |

L | 25% | $180,000 | |

N |
H | 40% | $700,000 |

L | 60% | $100,000 |

The manager maximizes expected utility (EU) when choosing policies, and their utility from a **net payoff** of `x` dollars is `u(x)=x^0.5` (that is, the square root of `x`).

1. Please determine the expected utility of each option and indicate which the manager would choose.

2. If you have time, also compute the expected value (EV) of each option and indicate what a risk neutral manager would choose.

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URL: https://wilcoxen.maxwell.insightworks.com/pages/7516.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 04/06/2022

URL: https://wilcoxen.maxwell.insightworks.com/pages/7516.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 04/06/2022