Assume that odds of a new computer requiring any type of service in the first two years are less than 1 in 10 000, and the average cost any computer service calls is only $120. However, Karen pays $300 for a two-year service contract on her new computer. She explains that her peace of mind is well worth the cost of the contract. What is Karen using to make her decision to purchase the service agreement, in this case?

Question

Quizplus · Accepted Answer

Karen is making her decision based on subjective utility, which refers to the personal value or satisfaction someone assigns to a particular outcome or decision. Even though the odds of her computer requiring service may be low, Karen values the peace of mind that comes with having a service agreement, and she is willing to pay $300 for that sense of security. This decision is based on her own subjective assessment of the importance of the outcome, rather than an objective analysis of future probabilities or costs (such as expected value or subjective probability).

Assume That Odds of a New Computer Requiring Any Type