Consider the payoff table in problem 7.Suppose that the probabilities of states of nature S2 and S3 occurring are equal and that the probability of state of nature S4 occurring is .50.If the probability of state of nature S1 occurring is three times the probability of state of nature S2 occurring, the optimal decision under the expected value criterion is:
A)D1
B)D2
C)D3
D)D4

Question

Quizplus · Accepted Answer

The expected value of each decision is:EV(D1) = (0.15)(100) + (0.15)(50) + (0.15)(25) + (0.50)(0) = 22.5EV(D2) = (0.15)(50) + (0.15)(100) + (0.15)(0) + (0.50)(25) = 27.5EV(D3) = (0.15)(25) + (0.15)(0) + (0.15)(100) + (0.50)(50) = 32.5EV(D4) = (0.15)(0) + (0.15)(25) + (0.15)(50) + (0.50)(100) = 37.5Therefore, the optimal decision under the expected value criterion is D4.

Consider the Payoff Table in Problem 7