Nick is considering buying a new bicycle. Here are his options: Bike A - costs $100. It has a 60% chance of breaking down in the next year.
Bike B - costs $200. It has a 20% chance of breaking down in the next year.
Bike C - costs $400. It has a 15% chance of breaking down in the next year.
Which bike should Nick purchase based on expected utility theory of repair costs?
A) Bike A
B) Bike B
C) Bike C
D) Either bike A or C
E) We can't possibly answer the question with the information provided.

Question

Quizplus · Accepted Answer

Expected utility theory suggests choosing the option with the lowest expected cost. Calculating the expected cost of repairs for each bike: Bike A: $100 + ($100 * 0.60) = $160, Bike B: $200 + ($200 * 0.20) = $240, Bike C: $400 + ($400 * 0.15) = $460. Bike A has the lowest expected cost.

Nick Is Considering Buying a New Bicycle