TABLE 19-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
-Referring to Table 19-1, if the probability of S1 is 0.2 and S2 is 0.8, then the expected monetary value of A1 is
A) 2.4.
B) 5.6.
C) 8.
D) 16.

Question

TABLE 19-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature. 
-Referring to Table 19-1, if the probability of S1 is 0.2 and S2 is 0.8, then the expected monetary value of A1 is
A) 2.4. 
B) 5.6. 
C) 8. 
D) 16.

Quizplus · Accepted Answer

To calculate the expected monetary value of each alternative, we multiply the payoff of each alternative under each state of nature by their respective probabilities and then add them up.

EMV of Alternative 1 = (0.2 x 1) + (0.8 x 6) = 0.2 + 4.8 = 5

EMV of Alternative 2 = (0.2 x 5) + (0.8 x 4) = 1 + 3.2 = 4.2

EMV of Alternative 3 = (0.2 x 4) + (0.8 x 2) = 0.8 + 1.6 = 2.4

Thus, the expected monetary value of A1 is 5.

Based on the EMV, the best choice would be A1, as it has the highest expected value.

TABLE 19-1 The Following Payoff Table Shows Profits Associated with a Set