Chapter 5
Utility and Game Theory
Learning Objectives
1.
Know what is meant by utility.
2.
Understand why utility is a better criterion than monetary value in some decision making situations.
3.
Know how to develop a utility function for money.
4.
Learn about the role a lottery plays in helping a decision maker assign utility values.
5.
Understand why risk avoiding and risk taking decision makers would assign different utility values in
the same decision making situation.
6.
Be able to discuss the relative merits of expected monetary value and expected utility as decision
making criteria.
7.
Know what is meant by a two-person, zero-sum game.
8.
Be able to identify a pure strategy for a two-person, zero-sum game.
9.
Be able to identify a mixed strategy and compute optimal probabilities for the mixed strategies.
10.
Know how to use dominance to reduce the size of a game.
11.
Understand the following terms:
utility
lottery
utility function
risk avoider
risk taker
expected utility
game theory
two-person, zero-sum game
saddle point
pure strategy
mixed strategy
dominated strategy