Lecture 12 - EU and VOI

# Lecture 12 - EU and VOI - EVPI and Utility Functions...

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EVPI and Utility Functions Lecture 12 1

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150 2 400 2 ) ( 2 x x x u + - = 20. 40. 60. 80. 100. .25 .50 .75 1.0 \$X Utility Suppose that one had the following utility function: Note: For calculations, use the functional form, not the graph. This utility function is valid only for values less than \$200 Polynomial Utility Function 2
\$0 0 \$100 1.00 0.25 0.75 Utility 0.25 \$19.72 ~ E.U. C.E. 5 . 37 2 005 . 0 or 150 2 400 2 25 . 2 2 - + - = + - = x x x x The certain equivalent (C.E.) of \$19.72 is found by using the quadratic function (solve the utility function for "x"): This is the most that one with this utility function would be willing to pay to get this lottery. Compare it to the expected value of \$25.00. Conclusions? Certain Equivalent 3

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\$0 0 \$100 1.0 0.25 0.75 \$10 0.13 Utility 0.25 \$19.72 0.13 \$10.00 Compare the C.E. or the E.U. of the two alternatives and pick the alternative with the higher value. Decision Problem
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Lecture 12 - EU and VOI - EVPI and Utility Functions...

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