3-43. The following computations are for the decision tree that follows.

EU(node 3) = 0.95(0.78) + 0.5(0.22) = 0.85

EU(node 4) = 0.95(0.27) + 0.5(0.73) = 0.62
EU(node 5) = 0.9(0.89) + 0(0.11) = 0.80
EU(node 6) = 0.9(0.18) + 0(0.82) = 0.16
EU(node 7) = 1(0.5) + 0.55(0.5) = 0.78
EU(conduct survey) = 0.85(0.45) + 0.8(0.55) = 0.823
EU(conduct pilot study) = 0.80(0.45) + 0.7(0.55) = 0.745
EU(neither test) = 0.81
Therefore, the best decision is to conduct the survey. Jim is a risk avoider.

3-44. a. P(good economy | prediction of

good economy) = = 0.923

0.8 0.6 0.1 0.4
P(poor economy | prediction of
 good economy) = = 0.077
0.8 0.6 0.1 0.4
P(good economy | prediction of

poor economy) = = 0.25

0.2 0.6 0.9 0.4
P(poor economy | prediction of

poor economy) = = 0.75

0.2 0.6 0.9 0.4

b. P(good economy | prediction of

good economy) = = 0.949

0.8 0.7 0.1 0.3
P(poor economy | prediction of

good economy) = = 0.051

0.8 0.7 0.1 0.3
P(good economy | prediction of

poor economy) = =
0.341
0.2 0.7 0.9 0.3

P(poor economy | prediction of

poor economy) = =
0.659
0.2 0.7 0.9 0.3

3-45. The expected value of the payout by the insurance company is

EV = 0(0.999) + 100,000(0.001) = 100
The expected payout by the insurance company is $100, but the policy costs $200, so the net
gain for the individual buying this policy is negative (–$100). Thus, buying the policy does
not maximize EMV since not buying this policy would have an EMV of 0, which is better
than a negative $100. However, a person who buys this policy would be maximizing the
expected utility. The peace of mind that goes along with the insurance policy has a relatively
high utility. A person who buys insurance would be a risk avoider.