Final answer:
The expected utility approach requires probabilities and considers an individual's risk preferences and utility from outcomes, unlike the expected value approach which maximizes average outcomes.The correct answer is option (c).
Step-by-step explanation:
Understanding the Expected Utility Approach
The expected utility approach is an economic principle that provides a framework for making decisions under uncertainty. Unlike the expected value approach, which relies on maximizing the mean outcome of a decision, the expected utility approach takes into account the decision maker's risk preferences and assigns a utility value to each possible outcome, this utility value measures the level of satisfaction or happiness that an individual gains from a particular outcome.
In the context of marginal utility, we see that individuals examine the additional satisfaction received from consuming one more unit of a good (marginal utility) and make decisions that maximize their overall utility. For example, if José has $57 to spend, and he is choosing between T-shirts ($14 each) and movies ($7 each), he may start by considering spending all his money on T-shirts. However, he might realize that the last T-shirt provides him the least marginal utility, and instead choose to spend the money on movies, which could offer him greater satisfaction. This is a step-by-step process involving trade-offs and aiming for the highest utility.
The expected utility approach does require probabilities as it is necessary to weigh the utility of outcomes against their likelihood. It does not typically lead to the same decision as the expected value approach, especially when the decision maker has a non-linear utility function or when there are 'excessively large or small payoffs' involved. Moreover, although it can be illustrated with a decision tree, a decision tree is not a requirement for applying the expected utility approach.