Mark m. upp has just been fired as the university bookstore manager
Mark m. upp has just been fired as the university bookstore manager.
Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus. There are two possible sites under consideration. If he opens the Small site and demand is good, he will generate a profit of $50,000. If demand is bad, he will lose $5,000. If he opens the Large site and demand is good he will generate a profit of $70,000, but he will lose $40,000 if demand is bad. He also has the option of not opening either. He believes that there is a 60 percent chance that demand will be good. He assigns the following utilities to the different profits:
U(0) = 0.12
U(50,000) = 0.5 U(-5,000) = 0.1
U(70,000) = 1 U(-40,000) = 0
What is the Expected Utility of each of Mark’s decision alternatives?
Based on Expected Utility, which decision should Mark make?
Is Mark a risk taker, risk avoider or risk neutral?