Expected Payoff
When the outcomes of a decision are uncertain, the expected payoff is a tool for analysis. It represents the average outcome, calculated as a weighted average of all possible results. Each result's value is multiplied by its probability of occurring, and these products are summed. By comparing the expected payoffs of different choices, an economic actor can make a rational decision under conditions of risk.
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CORE Econ
Ch.4 Strategic interactions and social dilemmas - The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
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Strategic Risk Aversion as an Explanation for Kenyan Farmers' High Offers
Expected Payoff
Evaluating a Strategic Offer
In a one-shot interaction where a Proposer must offer a split of $100 to a Responder, the Proposer considers offering just $10. Which statement best analyzes the strategic trade-off the Proposer is facing with this low offer?
The Proposer's Dilemma: Analyzing Risk vs. Reward
Explaining the Proposer's Gamble
A Proposer in a one-shot interaction is deciding how to split $100. Match each potential offer strategy with the most accurate description of its associated risk and potential reward for the Proposer.
In a one-shot interaction where a Proposer must split a sum of money with a Responder, the Proposer's most rational strategy is always to offer the smallest possible non-zero amount, because any accepted offer is better than the zero-payoff outcome of a rejection.
The Proposer's Calculation
Two individuals, Alex and Ben, are each participating as a Proposer in a one-shot interaction where they must offer a split of $100 to an unknown Responder. If the Responder rejects the offer, both parties receive $0. Alex decides to offer the Responder $40. Ben decides to offer the Responder $10. Which of the following statements most accurately compares the strategic trade-off each Proposer is making?
Analyzing Strategic Offers with Probabilities
A Proposer in a one-shot interaction is deciding how to split $100 with a Responder. The Proposer believes there is a 50% chance the Responder will reject any offer below $30, but will certainly accept any offer of $30 or more. To maximize their own potential earnings from a purely self-interested standpoint, which offer should the Proposer make?
Learn After
Proposer's Expected Payoff from an Offer
Using Expected Payoff to Decide on a Product Warranty
Expected Payoff from a Coin Toss Gift
General Calculation of Expected Payoff
A company is deciding whether to launch a new product. The marketing department provides the following analysis:
- If the launch is successful, the company will earn a profit of $5 million.
- If the launch fails, the company will incur a loss of $2 million.
- Based on market research, there is a 40% probability of success and a 60% probability of failure.
Assuming the company makes decisions based on maximizing the weighted average of all possible outcomes, what is the most rational course of action?
Investment Decision Analysis
Farmer's Planting Decision
A company is deciding between two mutually exclusive projects, Project X and Project Y. An initial analysis reveals that Project X has a significantly higher probability of success than Project Y. Based solely on this information, a rational, risk-neutral decision-maker should choose Project X to maximize their expected payoff.
A venture capitalist is evaluating four different startup investment opportunities. Match each opportunity, described by its potential outcomes and their probabilities, with its correct expected payoff.
A software company is considering adding a new feature. Market analysis suggests a 30% chance the feature will be a major success, generating $100,000 in profit; a 50% chance it will be moderately successful, generating $20,000 in profit; and a 20% chance it will fail, resulting in a loss of $40,000. The expected payoff of developing this feature is $____. (Enter a whole number without commas or dollar signs).
Critique of a Decision-Making Process
A manager needs to make a rational decision between two different investment strategies, where the final profit for each strategy is uncertain. Arrange the following steps into the correct logical sequence they should follow to determine the best strategy by comparing the weighted average of all possible results.
A firm is deciding between two mutually exclusive projects. Project A has a 70% chance of earning $10 million and a 30% chance of losing $5 million. Project B has a 40% chance of earning $20 million and a 60% chance of losing $6 million. The firm initially determines that Project A is the better choice by comparing the weighted average of all possible outcomes. Which of the following independent changes to the scenario would reverse this decision, making Project B the more rational choice?
Critique of a Business Expansion Analysis