The following is a payoff table giving profits for various situations. If a person were to use the expected monetary value criterion, what decision would be made?
A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 4

Question

The following is a payoff table giving profits for various situations.  If a person were to use the expected monetary value criterion, what decision would be made?
A)Alternative 1 
B)Alternative 2 
C)Alternative 3 
D)Alternative 4

Quizplus · Accepted Answer

To determine which alternative to choose using the expected monetary value (EMV) criterion, we multiply the probability of each outcome by its respective payoff, and then sum those values for each alternative.

For Alternative 1:
(0.4 x $100,000) + (0.2 x $80,000) + (0.4 x $20,000) = $56,000

For Alternative 2:
(0.25 x $100,000) + (0.5 x $50,000) + (0.25 x $20,000) = $47,500

For Alternative 3:
(0.3 x $90,000) + (0.3 x $40,000) + (0.4 x $30,000) = $44,000

For Alternative 4:
(0.2 x $120,000) + (0.3 x $50,000) + (0.5 x $10,000) = $38,000

Therefore, the best choice using the EMV criterion is Alternative 3 because it has the highest expected monetary value of $44,000.

The Following Is a Payoff Table Giving Profits for Various