Chapter6Q12answer

Chapter6Q12answer - Chapter 6 Question 12 a) Mean no. of...

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Chapter 6 a) Mean no. of passengers Utility 15 000 0.00 20 000 0.80 22 000 0.95 25 000 1.00 Profit ($m) Utility 1.0 0.00 1.1 0.20 1.4 0.60 1.7 0.75 2.0 0.90 3.0 1.00 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 15000 17000 19000 21000 23000 25000 Mean no. of passengers Utility 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.0 1.5 2.0 2.5 3.0 Profit ($m) a) The utility functions generally suggest risk aversion for both attributes. To see this consider the profit utility function. The utility for $2 million is 0.9. This implies that the chief executive was indifferent between the following two lotteries: Profit ($m) 3.0 Profit ($m) 2.0 1.0 0.9 1.0 0.1 A risk neutral decision maker would have been indifferent between these options when the probability of the profit of $3 million in the gamble was only 0.5 because, at this probability, the expected value of the two options would have been the same. Thus the executive required a higher probability of ‘winning’ the gamble than a risk neutral decision maker before he would consider the gamble. (continued…
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b) i) The value of k 1 means that the chief executive would have been indifferent between the
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Chapter6Q12answer - Chapter 6 Question 12 a) Mean no. of...

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