The Maxwell School
Syracuse University
Syracuse University
The manager of a small nonprofit is two actions for helping the organization's target population. Action C is a conventional approach and action N is a newer option that's riskier. Both policies cost $100,000 and have either high (H) or low (L) gross payoffs. However, the payoffs and probabilities differ:
| Action | State | Probability | Gross Payoff |
|---|---|---|---|
| C | H | 75% | $220,000 |
| L | 25% | $180,000 | |
| N | H | 40% | $700,000 |
| L | 60% | $100,000 |
The manager maximizes expected utility (EU) when choosing policies, and their utility from an overall payoff of `x` dollars (after deducting the cost of the policy) is `u(x)=x^0.5` (that is, the square root of `x`).
1. Please determine the expected utility of each option and indicate which the manager would choose.
2. If you have time, also compute the expected value (EV) of each option and indicate what a risk neutral manager would choose.