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UTILITY AND DECISION MAKING 585

c. Assume we found the following indifference probabilities for the lottery defined in
part (b):
cost Indifference Probability (p)

E10 000 0.99
100 000 0.60

What decision would you recommend?
d. Do you favour using expected value or expected utility for this decision problem? Why?
20 A new product has the following profit projections and associated probabilities:

Profit Probability
150 000 0.10
100 000 0.25
50 000 0.20
0 0.15
50 000 0.20
100 000 0.10

a. Use the expected value approach to make the decision of whether to market the new
product.
b. Because of the high euro values involved, especially the possibility of a E100 000 loss,
the marketing vice president 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? Assume the following indifference probabilities are assigned:

Profit Indifference Probability (p)
E100 000 0.95
50 000 0.70
0 0.50
50 000 0.25

c. Use expected utility to recommend a decision.
d. Should the decision maker feel comfortable with the final decision recommended by the
analysis?

CASE PROBLEM 1 Property Purchase Strategy

lenn Foreman, president of Oceanview bid of E5 million will have a 0.2 probability of
G Development Corporation based in Portu- being the highest bid and securing the property
gal, is considering submitting a bid to purchase for Oceanview. The current date is 1 June. Sealed
property that will be sold by sealed bid. Glenn’s bids for the property must be submitted by 15
initial judgement is to submit a bid of E5 million. August. The winning bid will be announced on 1
Based on his experience, Glenn estimates that a September.

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