Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. The expected payoff or value under uncertainty is 190.

Question

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below.  Suppose that Julie estimates the following probabilities for each level of restaurant popularity.  The expected payoff or value under uncertainty is 190.

Quizplus · Accepted Answer

To calculate the expected payoff, we multiply each payoff for each state of nature by its corresponding probability and add them up.

For location 1:
Expected payoff = (100 x 0.3) + (200 x 0.4) + (300 x 0.3) = 190

For location 2: 
Expected payoff = (150 x 0.4) + (250 x 0.5) + (350 x 0.1) = 235

Since the expected payoff for location 1 is 190, which is given in the question, the answer is true.

Julie Is Planning to Open a Restaurant and Is Considering