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TUTO 3 CHAP UTILITY GAME

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15 views3 pages

TUTO 3 CHAP UTILITY GAME

Uploaded by

omarselmi374
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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University of Tunis Fall 2024 Decision & Game Theory

Tunis Business School

Tutorial 3

Question 1

Rym is trying to determine which of two courses to take. If she takes the operations research
course, she believes that she has a 10% chance of receiving an A, a 40% chance for a B, and a
50% chance for a C. If Rym takes a statistics course, she has a 70% chance for a B, a 25%
chance for a C, and a 5% chance for a D. Rym is indifferent between L1 and L2 and she is
also indifferent between L3 and L4. Which course should she take?

Question 2
A decision maker faces a risky gamble in which she may obtain one of five outcomes. Label
the outcomes A, B, C, D, and E. A is the most preferred, and E is least preferred. She has
made the following three assessments.
• She is indifferent between having C for sure or a lottery in which she wins A with
probability 0.5 or E with probability 0.5.

• She is indifferent between having B for sure or a lottery in which she wins A with
probability 0.4 or C with probability 0.6.

• She is indifferent between these two lotteries: Lottery 1: A 50% chance at B and a 50%
chance at D and Lottery 2: A 50% chance at A and a 50% chance at E.

What are U(A), U(B), U(C), U(D), and U(E)?

Question 3

Consider a decision-maker having a utility function for asset position x given by u(x) =
ln(x).Suppose that the decision-maker has 40,000 TD and he is considering the following
two lotteries:
L1: With probability 1, he loses 2,000 TD from his asset position.
L2: With probability 0.9, he gains 0 TD and with probability 0.1, he loses 20,000 TD from his
asset position.
1. Which lottery he prefers?
2. Determine the risk premium of L2.
3. Is the decision-maker risk-averse, risk-neutral, or risk seeking? Explain.

Question 4
A company A is being prosecuted by a company B. Company B can settle out of court and
win 40,000TD, or go to court. If company B goes to court, there is a 30% chance that it
will win the case. If it wins, a small and a large reimbursement are equally likely (a small
reimbursement nets 20,000TD, and a large reimbursement nets 100,000TD). Company B’s
director has an utility function for an increase x TD in his cash position given by u(x)=x1/2
1. Find the optimal decision of company B.
2. The director of company B can hire a consultant to predict without error who
will win. Should he hire the consultant? If yes how much should he be paid?

Question 5
Some important equipment in a production facility of AZ Company has failed. The
technicians of the maintenance department think that it is possible to restore it in their repair
facility (in-house repair option). Given that the equipment is sophisticated and costly, the head
of the production department thinks that it is safer to send it to some qualified maintenance
company for repair (external repair option). The external repair option would cost 25, 000
TND if no maintenance induced failure occurs. Otherwise, it would cost 20% more. An
induced maintenance failure occurs 30% of the time. It is however more difficult to assess the
cost for the in-house repair option. A rough estimate is given by: 12, 000 TND if a quick and
successful repair (QTND) occurs, 16,000 TND if a successful but time consuming (STCR)
repair occurs, and 75, 000 TND if a total breakdown (TB) occurs, necessitating full
replacement of the equipment. Under the in-house repair option, (QTND) has 40% chance to
happen, (STCR) has 50% chance to happen, and (TB) has 10% chance to happen. Assume
that the DM is risk-averse with respect to cost and has a utility function of the form u(x) =
(ax+b)1/2. What is the repair option that maximizes the expected utility of cost? What is the
risk premium of each repair option? Interpret.

Question 6
A shipping company has three different services regular, special and express delivery. The
cost of a delivery per container to a particular country A is respectively 5,000 TND, 8,000
TND, and 15,000 TND. Past experience indicates the following chances for delivery time
with each type of service:

A supplier of some material has many customers in country A. Most of his customers require
a lead-time delivery of no more than 3 weeks. If the supplier fails to ship the material within
the due time, he would be penalized 20,000 TND per container according to the signed
contracts with these customers.

1. The supplier utility function for cost is of the form (ax+b) 1/2. Use decision trees to solve the
supplier problem of maximizing the expected utility of cost per container.

2. Compute the risk premium of each lottery in the decision problem. Interpret.

3. It is possible to acquire perfect information for the regular delivery at 2,000 TND. Is it
worth going for this option?

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