Mul$a&ribute

u$liy func$ons
Carles Sitompul

 Extension of u$lity theory to situa$ons in which

more than one a&ribute aects the decisions
makers preferences and a?tude toward risk.
Von Neumann-Morgenstern subscriber choose
the lo&ery or the alterna$ve that maximizes his
or her expected u$lity.
Discussion is restricted to only two a&ributes.
Detailed discussion is available on Bunn (1984)
and Keeney and Raia (1976).

xi = level of attribute i
u(x1 , x2 ) = utility associated with level x1 of attribute 1 and level x2 of attribute 2

How can we nd a u$lity func$on u(x

1 , x 2 ) such that
choosing a lo&ery or alterna$ve:
Maximizes the expected value of u(x1 , x2 )
Consistent with the decision makers preferences and a?tude
toward risk

Properties of Multiattribute Utility Functions

Properties of Multiattribute Utility Functions
NITION

TION

Attribute 1 is utility independent (ui) of attribute 2 if preferences for lotteries

Attribute
1 different
is utilitylevels
independent
(ui)
of not
attribute
if preferences
for lotteries
involving
of attribute
1 do
depend2 on
the level of attribute
2.
involving different levels of attribute 1 do not depend on the level of attribute 2.

Lets reconsider the problem of Wivco Toy Corporation. Wivco is introducing a new
product
(a globot) the
andproblem
must determine
what
price
to charge for
each is
globot.
Two factors
Lets reconsider
of Wivco
Toy
Corporation.
Wivco
introducing
a new
Considers
t
he
p
roblem
o
f
W
ivco
T
oy
C
orpora$on:
(market
andand
profits)
affect Wivcos
pricing
decision.
product
(a share
globot)
mustwill
determine
what price
to charge
forLet
each globot. Two factors
x1 = share
Wivco's
(market
andmarket
profits)xshare
will affect Wivcos pricing decision. Let
1 ! Wivcos market share
x2 = Wivco's profit (millions
of dollars)
x x !!Wivcos
market
share of dollars)
Wivcos
profits (millions
12

profits (millions of dollars)

2 ! Wivcos
Suppose that Wivco is xindifferent
between
Suppose that Wivco is indifferent
between
"1"
2
10%, $5
1
L1

""
2
"1"
2
"1"
2

10%, $5
30%, $5

and

1
L#1 "" 16%, $5
1
L#1 "" 16%, $5

L1
and
If attribute 1 (market share) is ui 30%,
of attribute
$5 2 (profit), Wivco would also be indifferent
between
If attribute 1 (market share) is ui of attribute 2 (profit), Wivco would also be indifferent
between
"1"
2
10%, $20
1
1
""
L2
and
L#2 "" 16%, $20
21
10%, $20
""
2
30%, $20
1
#
L2
and
L
"
" 16%, $20
2
"1"
In short, if market share2 is ui of profit, then for any level of profits, a "12" chance at a 10%

market share.
If attributes 1 and 2 are mui, it can be shown that the decision makers utility function
u(x1, x2) must be of the following form:
TION
If attribute 1 is ui of attribute 2, and attribute 2 is ui of attribute 1, then attributes
u(x1, x2)utility
! k1uindependent
u1(x1)u2(x2)
(10)
1 and 2 are mutually
(mui).
1(x1) $ k2u2(x
2) $ k3

In (10), k1, k2, and k3 are constants, and u1(x1) and u2(x2) are functions of x1 and x2, reIf attributes
1 and
2isare
mui,called
it can abemultilinear
shown that utility
the decision
makers utility function
spectively.
Equation
(10)
often
function.
u(x
,
x
)
=
k
u
(x
)
+
k
u
(x
)
+
k
u
(x
)u
(x
)
1
2
1 1 1
2 2
2
1
2
2
u(xshow
must
of the following
form: 3 1exhibits
1, x2) that
To
a be
multilinear
utility function
mui, we assume that Wivcos utilMul$linear
$lity
ity function
is of the uform
and that Wivco is indifferent between L1 and L#1. If Wivco
u(x1(10)
, fxunc$on
(10)
2) ! k1u1(x1) $ k2u2(x2) $ k3u1(x1)u2(x2)
exhibits mui, then Wivco should also be indifferent between L2 and L#2. Using (10), we
'u1(x1) and u2(x2) are functions of x1 and x2, re(10),
k1a, bove
k2, and
are constants,
#13 implies
From
ekqua$on
can In
now
show
that
L1iL
La2nd
iL#2. and
(10) and L1iL#1 imply
LFirst,
iL
1 i
spectively. Equation (10) is often called a multilinear utility function.
"1"[ka1u
u2(5) $
k3u1(10)u
1(10) $ k2utility
2(5)] mui, we assume that Wivcos utilTo show that
multilinear
function
exhibits
2
#
ity function is "1of
form$
(10)
indifferent
between
"[kthe
"1"[ and
u (10)
k1u1that
(30)Wivco
$ k2uis
$ k3u1(30)u
2(5)
2(5)]L1 and L1. If Wivco
2 1 1
2
exhibits mui, then Wivco
indifferent
between
L2 and L#2. Using (10), we
! k1should
u1(16) also
$ k2be
u2(5)
$ k3u1(16)u
2(5)
can now show that L1iL#1 implies L2iL#2. First, (10) and L1iL#1 imply
Simplifying this equation yields (if k1 ! 0)
"1"[k1u1(10) $ k2u2(5) $ k3u1(10)u2(5)]
1 3 . 6"1"[uDecision
Making
with Multiple
Objectives
777 (11)
2
(10)
#
u
(30)]
$
u
(16)
1
1
1
1
1
""[k1u1(10) $ ""[2 k1u1(30) $ k2u2(5) $ k3u1(30)u2(5)]
2
2
Using
(11),
we
find
Using above, we nd ! k1u1(16) $ k2u2(5) $ k3u1(16)u2(5)
E(U for L2) $ "12"[k1u1(10) # k2u2(20) # k3u1(10)u2(20)]
1$3#
. 6"1"[kDecision
Making
777
u (30)
# with
k2uMultiple
# k3u1(30)u2(20)]
2(20) Objectives
2 1 1
$ k1u1(16) # k2u2(20) # k3u1(16)u2(20)
$ E(U for L%2)
Thus, we see that a multilinear utility function of the form (10) implies that attribute 1 is

NITION

$ # "12"[k1u1(30) # k2u2(20) # k3u1(30)u2(20)]

$ k1u1(16) # k2u2(20) # k3u1(16)u2(20)
$ E(U for L%2)
Thus, we see that a multilinear utility function of the form (10) implies that attribute 1 is
ui of attribute 2. Similarly, it can be shown that (10) implies that attribute 2 is ui of attribute 1. Thus, (10) implies that attributes 1 and 2 are mui. It can also be shown that if
x1 and x2 are mui, then u(x1, x2) must be of the form (10) (see Keeney and Raiffa (1976)).
THEOREM

Attributes 1 and 2 are mui if and only if the decision makers utility function
u(x1, x2) is a multilinear function of the form
u(x1, x2) $ k1u1(x1) # k2u2(x2) # k3u1(x1)u2(x2)

(10)

The determination of a decision makers utility function u(x1, x2) can be further simplified if it exhibits additive independence. Before defining additive independence, we
must define x1 (best) or x2 (best) to be the most favorable level of attribute 1 or 2 that can
occur; also, x1 (worst) or x2 (worst) is the least favorable level of attribute 1 or 2 that can
occur.
A decision makers utility function exhibits additive independence if the decision
maker is indifferent between
1

occur.A decision makers utility function exhibits additive independence if the decision
maker is indifferent between

NITION

TION

A decision makers
utility function exhibits additive independence
if the decision
"1"
"1"
2
2
x1(best), x2(best)
x1(best), x2(worst)
maker is indifferent between
"1" "1"
2 2
"1"
2

and
x1(best),
x2(best)
x1(worst),
x2(worst)
and

"1"
2
"1"
2

"1"
2

x1(best),
x2(worst)
x1(worst),
x2(best)
(11)

x1(worst), x2(worst)
x1(worst), x2(best)
Essentially, additive independence of attributes 1 and 2 implies that preferences
(11) over
lotteries
involving only attribute 1 (or only attribute 2) depend only on the marginal dis Depend only on the marginal distribu$on for possible values of a&ribute 1 (or a&ribute 2)
tribution
for possible
values
of attribute
1 (or of attribute
2) and 1do
not depend on the
Essentially,
Do not depend
on the
joint distribu$on
f the possible
values
of a&ribute
nd 2.
additive
independence
of oattributes
1 and
2 implies
that apreferences
over
joint
distribution
of
the
possible
values
of
attributes
1
and
2.
lotteries involving only attribute 1 (or only attribute 2) depend only on the marginal disIf attributes
1 andvalues
2 are of
mui
and the1decision
makers 2)
utility
exhibits
tribution
for possible
attribute
(or of attribute
and function
do not depend
onadditive
the
independence,
itnd
isthe
to ui
show
k3 $
0 must
As in Section 2.2, simIf adistribution
&ribute 1 aof
2easy
apossible
re m
avalues
nd that
u$lity
f(10),
unc$on
ddi$ve
joint
ofinattributes
1exhibits
and
2. ahold.
ply
scale u1(x11)and
and2 uare
2(xmui
2) such
independence:
If attributes
andthat
the decision makers utility function exhibits additive
independence, it is easy to show
that in$
(10),
01must
hold.
u1(x1(best))
1 k3 u$1(x
(worst))
$ As
0 in Section 2.2, simply scale u1(x1) and u2(x2) such that
u2(x2(best)) $ 1
u2(x2(worst)) $ 0
u1(x1(best)) $ 1
u1(x1(worst)) $ 0
Now (10) implies
u2(x2(best)) $ 1
u2(x2(worst)) $ 0
u(x1(best), x2(best)) $ k1 # k2 # k3
u(x1(worst), x2(worst)) $ 0
Now (10) implies
u(x1(best), x2(worst)) $ k1
u(x1(worst), x2(best)) $ k2
u(x1(best), x2(best)) $ k1 # k2 # k3
u(x1(worst), x2(worst)) $ 0
x2(worst))
k1
u(x1(worst), x2(best)) $ k2
C H A P T E Ru(x
11(best),
3 Decision
Making under$Uncertainty

Then additive independence implies that

1
!!(k1
2

" k2 " k3) " !12!(0) # !12!(k1) " !12!(k2)

k3 # 0

Thus, if attributes 1 and 2 are mui and the decision makers utility function exhibits additive independence, his or her utility function is of the following additive form:
u(x1, x2) # k1u1(x1) " k2u2(x2)

(12)

Assessment of Multiattribute Utility Functions

If attributes 1 and 2 are mui, how can we determine u1(x1), u2(x2), k1, k2, and k3? To
determine u1(x1) and u2(x2), we apply the technique that was used to assess utility functions in Section 13.2. We illustrate by determining u1(x1). Let u1(x1(best)) # 1 and
u1(x1(worst)) # 0. Next determine a value of attribute 1 (call it x1(!12!)) having u1(x1(!12!)) #
!1!. By the definition of u1(x1(!1!)) and mui, the decision maker is (for any value of x2)

1
!!(k1
2

" k2 " k3) " !12!(0) # !12!(k1) " !12!(k2)

k3 # 0

Assessment of mul$a&ribute u$lity

func$ons

Thus, if attributes 1 and 2 are mui and the decision makers utility function exhibits additive independence, his or her utility function is of the following additive form:
u(x1, x2) # k1u1(x1) " k2u2(x2)

(12)

If a&ributes 1 and 2 are mui, how can we determine

Assessment of Multiattribute Utility Functions

If attributes 1 and 2 are mui, how can we determine u1(x1), u2(x2), k1, k2, and k3? To
determine
) and (x
u2(x),
1(x1),u
2), we apply the technique that was used to assess utility funcu1u(x
1
2
2 k1 , k2 , k 3
tions in Section 13.2. We illustrate by determining u1(x1). Let u1(x1(best)) # 1 and
u1(x1(worst)) # 0. Next determine a value of attribute 1 (call it x1(!12!)) having u1(x1(!12!)) #
1
1 1 of u (x (!1!)) and mui, the decision maker is (for any value of x )
!!. By the
u1 definition
x
=
1 1 2
2
2
1 2 2
indifferent between
!1!
2

!1!
2

x1(best), x2
and
x1(worst), x2

"#

1
1
L! !! x1 !! , x2
2

Thus, x1(!12!) may be determined from the fact that the certainty equivalent of L is (x1(!12!),
x2). In a similar fashion, we can determine values x1(!14!) and x1(!34!) of the first attribute sat 1 1
3 3
isfying u1(x1(!14!)) # !14! and u1(x1(!34!)) # !34!. Continuing inu1this
we
approximate
u1 may
x
=
=
x1 fashion,
4
4
1 4 4
u1(x1) and u2(x2).u (x ),u (x )
1 k1 , we2begin
2 by rescaling u (x ), u (x ), and u(x , x ) such that
To find k1, k2, and
3
1 1
2 2
1
2

Con$nuing this fashion for and others

un$l are found.

u(x1(best), x2(best)) # 1,
u1(x1(best)) # 1,
u1(x1(worst)) # 0,
Now (10) yields

u(x1(worst), x2(worst)) # 0,
u2(x2(best)) # 1,
u2(x2(worst)) # 0

1
!!
2

1
!!
2

x1(best), x2
and
x1(worst), x2

"#

1
1
L! !! x1 !! , x2
2

Thus, x1(!12!) may be determined from the fact that the certainty equivalent of L is (x1(!12!),
x2). In a similar fashion, we can determine values x1(!14!) and x1(!34!) of the first attribute satisfying u1(x1(!14!)) # !14! and u1(x1(!34!)) # !34!. Continuing in this fashion, we may approximate
2
3
u1(x1) and u2(x2). 1
To find k1, k2, and k3, we begin by rescaling u1(x1), u2(x2), and u(x1, x2) such that

To nd k , k and k :

u(x1(best), x2(best)) # 1,
u1(x1(best)) # 1,
u1(x1(worst)) # 0,

u(x1(worst), x2(worst)) # 0,
u2(x2(best)) # 1,
u2(x2(worst)) # 0

Now (10) yields

u(x1(best), x2(worst)) # k1(1) " k2(0) " k3(0) # k1
Thus, k1 can be determined from the fact that the decision maker is indifferent between
k1
1
!! u(x1(best), x2(worst))

and

1 $ k1

u(x1(best), x2(best))
u(x1(worst), x2(worst))

Similarly (see Problem 3 at the end of this section), u(x1(worst), x2(best)) # k2 and k2
can be determined from the fact that the decision maker is indifferent between

and

!1!
2

x1(worst), x2

"#

1
1
L! !! x1 !! , x2
2

Thus, x1(!12!) may be determined from the fact that the certainty equivalent of L is (x1(!12!),
x2). In a similar fashion, we can determine values x1(!14!) and x1(!34!) of the first attribute satisfying u1(x1(!14!)) # !14! and u1(x1(!34!)) # !34!. Continuing in this fashion, we may approximate
u1(x1) and u2(x2).
To find k1, k2, and k3, we begin by rescaling u1(x1), u2(x2), and u(x1, x2) such that
u(x1(best), x2(best)) # 1,

u(x1(worst), x2(worst)) # 0,

u(x
x (worst))=
k1 (1)#+0, k2 (0)
+ k3 (0)#=1,k1
1 (best),
u (x
(best)) # 21,
u (x (worst))
u (x (best))
1

u2(x2(worst)) # 0

Now (10) yields

u(x1(best), x2(worst)) # k1(1) " k2(0) " k3(0) # k1
Thus, k1 can be determined from the fact that the decision maker is indifferent between
k1
1
!! u(x1(best), x2(worst))

and

1 $ k1

u(x1(best), x2(best))
u(x1(worst), x2(worst))

Similarly (see Problem 3 at the end of this section), u(x1(worst), x2(best)) # k2 and k2
can be determined from the fact that the decision maker is indifferent between
k2
1
!! u(x1(worst), x2(best))

and

1 $ k2

u(x1(best), x2(best))
u(x1(worst), x2(worst))

To find k1, k2, and k3, we begin by rescaling u1(x1), u2(x2), and u(x1, x2) such that
u(x1(best), x2(best)) # 1,
u1(x1(best)) # 1,

u1(x1(worst)) # 0,

u(x1(worst), x2(worst)) # 0,
u2(x2(best)) # 1,

u2(x2(worst)) # 0

Now (10) yields

u(x1(best), x2(worst)) # k1(1) " k2(0) " k3(0) # k1
Thus, k1 can be determined from the fact that the decision maker is indifferent between
k1

(best), x2(best))
u(x1 (worst), x2 (best))= k1 (0) + k2 (1) + k3 (0) = ku(x
2 1
1
!! u(x1(best), x2(worst))

and

1 $ k1

u(x1(worst), x2(worst))

To determine
k2 (see Problem 3 at the end of this section), u(x1(worst), x2(best)) # k2 and k2
Similarly

can be determined from the fact that the decision maker is indifferent between
k2
1
!! u(x1(worst), x2(best))

and

1 $ k2

u(x1(best), x2(best))
u(x1(worst), x2(worst))

To determine k3, observe that from (10) and

u(x1(best), x2(best)) # u1(x1(best)) # u2(x2(best)) # 1
we find that
1 # u(x1(best), x2(best)) # k1(1) " k2(1) " k3(1) # k1 " k2 " k3

k2
1
!! u(x1(worst), x2(best))

and

1 $ k2

u(x1(best), x2(best))
u(x1(worst), x2(worst))

To determine k3, observe that from (10) and

u(x1(best), x2(best)) # u1(x1(best)) # u2(x2(best)) # 1
we find that
1 # u(x1(best), x2(best)) # k1(1) " k2(1) " k3(1) # k1 " k2 " k3
Making with Multiple Objectives
k11+3k.2 6+ kDecision
3 =1
k3 = 1 k1 k2

If utility function exhibits additive independence, k3 = 0

779

Procedures:
1. Check whether a&ributes 1 and 2 mui.
Otherwise see Keeney and Raia (1976)
2. Check for addi$ve independence.
3. Assess u1 (x1 ) and u2 (x2 )
4. Determine k 1 , k 2 and (if there is no addi$ve
independence) k3
5. Check to see whether the assessed u$lity
func$on is really consistent with the decision
makers preferences.

 Fruit Computer company is certain that its market

share during 2005 will be between 10% and 50%.
Fruit is also sure that its prot will be between $5
million and $30 million.
x1 = Fruit's market share
x2 = Fruit's profit (in million dollars)

x1 " Fruits market share during 2005

x2 " Fruits profit during 2005 (in millions of dollars)
Solution

We begin by checking for mui. It is helpful to draw a diagram (see Figure 14) th
plays various levels of each attribute. First, we check whether attribute 1 (market
is ui of attribute 2 (profit). We ask Fruit for the certainty equivalent of a $12$ chance

Profit
(millions of $)
30
25
20
15
FIGURE

14

Possible Levels of Each

Attribute for Fruit
Computer Company

780

10
5
0

CHAPTER

10

20

30

1 3 Decision Making under Uncertainty

40

50

Market share (%)

"1" chance
are
(10%)
andand
a "12a" chance
atatthe
(50%),with
withx2x2fixed
fixed
t share
(10%)
thebest
bestmarket
market share
share (50%),
"1" at at
2
2
say
x2 $15
! $15
million).
Supposethe
thecertainty
certainty equivalent
equivalent of
x2 !
million).
Suppose
of

1 1
"" "2"
2

10%, $15
$15
10%,

"1"
2

1
1 ""
"" 2

10%, $20
50%, $20

2
50%,
$15
If attribute
150%,
is ui$15
of attribute 2, the certainty equivalent of this lottery should be c
5). To determine whether
attribute
is uiother
of attribute
2, we
(30%,
$20).1For
values
of fix
x2 attribute
(say, x22!at $5, $10, $25, and $30), we check if t
o
determine
whether
attribute
1
is
ui
of
attribute
2,
we
fix
attribute
2 at
evel (say, x2 !Suppose
$20 tainty
million)
and
find
Fruits
certainty
equivalent
for
the
folequivalent
the lottery
the
certainty
eof
quivalent
o
f the above
is (30%,$15).
(say, x2 ! $20 million)
and
find Fruits
certainty
equivalent
for the
fol-

y:

1
""
1 2

""
2
"1"
2

"1"
2

10%, $20

"1"
2

10%, $20
50%, $20

"1"
2

50%, $20
is ui of attribute 2, the certainty equivalent
of this lottery should be close to

10%, x2
50%, x2

close
toequivalent
(30%,
xof
Suppose
this
the
case.
Forofother
values2,ofthe
xis
(say,
x2 !
$5,
$10, $25,
$30),
weshould
checkisifbe
the
cer2).and
2 certainty
ui
attribute
this
lottery
close
to Then we repeat this procedure wit
lent of the lottery values of market share replacing 10% and 50%. If similar results ensue, then attr
other
values Suppose
of x2 (say,that
x2 !the
$5, c$10,
$25, and
$30), weis
check
if the
cer-to (30%, x ).
ertainty
equivalent
always
close
2
is ui of"1" attribute 2. In analogous fashion, we can determine whether attribute 2 is u
of the lottery
2

10%, x2 1 is ui of attribute 2, and attribute 2 is ui of attribute 1, the

tribute1 1. If attribute
""
2 are mui. Lets assume that attributes 1 and 2 are (at least approximately) m
tributes
If similar
r"1esults
ensue
10%,
x2 when we are replacing the market share
"
2
proceed
to
step
2 x(checking
for 1
additive
independence).
50%,
2
of 10% and
5
0%,
t
hen
a
&ribute

i
s
u
i
o
f a&ribute 2
1"
"
for we
additive
independence,
we must determine whether Fruit is indi
2 check
30%, x2). Suppose this isTo
the
case. Then
repeat this
procedure with other
50%, x2
arket share replacingbetween
10% and 50%. If similar
results ensue, then attribute 1

bute
In analogous
we can
determine
whether
2 iswith
ui ofother
at, x2).2. Suppose
thisfashion,
is the case.
Then
we repeat
this attribute
procedure
attribute 1 is ui of attribute 2, and attribute 2 is1 ui of attribute 1, the two at-

ui of attribute 2. In analogous fashion, we can determine whether attribute 2 is ui of atbute 1. If attribute 1 is ui of attribute 2, and attribute 2 is ui of attribute 1, the two atbutes are mui. Lets assume that attributes 1 and 2 are (at least approximately) mui and
oceed to step 2 (checking for additive independence).
a&ribute we
1 amust
nd 2determine
are mui,
proceed
heck
To check Assume
for additivethat
independence,
whether
Fruitto
is cindifferent
tween
for addi$ve independence
"1"
2
"1"
2

"1"
2

50%, $30
and

50%, $5

"1"
2

10%, $5

10%, $30

ppose that Fruit is not indifferent between these lotteries. Then Fruits utility function
ll not exhibit additive independence. We now know that u(x1, x2) may be written as

Suppose that Fruit is not indierent between these lo&eries,

u(x1, x2) ! k1u1(x1) # k2u2(x2) # k3u1(x1)u2(x2)

We now proceed
u1(x1) and u2(x2)). Suppose we obtain the results
u(x1 , x2to
) =step
k1u13(x(assessing
1 ) + k2 u 2 (x2 ) + k 3u1 (x1 )u 2 (x2 )
own in Figure 15. To complete the assessment of Fruits multiattribute utility function,
must determine k1, k2, and k3 (step 4). To find k1, we ask Fruit to determine the numr k1 that makes Fruit indifferent between
k1

50%, $30

u(x1, x2) ! k1u1(x1) # k2u2(x2) # k3u1(x1)u2(x2)

We now proceed to step 3 (assessing u1(x1) and u2(x2)). Suppose we obtain the result
wn in Figure 15. To complete the assessment of Fruits multiattribute utility function
To determine
must determine
k1, k2, andkk1 3 (step 4). To find k1, we ask Fruit to determine the num
k1 that makes Fruit indifferent between
k1
1
"" 50%, $5

and

1 $ k1

50%, $30
10%, $5

1 3 . 6 Decision Making with Multiple Objectives

Suppose that for k1 =0.6, Fruit is indierent between these two
lo&eries.

781

0
5

10

15

20

25

30

x2(millions of $)

(b) Profit

To determine k2

Suppose that for k1 ! 0.6, Fruit is indifferent between these two lotteries. Similarly, k2 is
the number that makes Fruit indifferent between
k2
1
"" 10%, $30

and

1 # k2

50%, $30
10%, $5

Suppose that for k2 ! 0.5, Fruit is indifferent between these two lotteries. Now k3 ! 1 #
k1 # k2 !
#0.1, and
multiattribute
function
is
Suppose
that Fruits
for k =
0.5, Fruit is utility
indierent
between
these
2

lo&eries. u(x1, x2) ! 0.6u1(x1) $ 0.5u2(x2) # 0.1u1(x1)u2(x2)

where u1(x1) and u2(x2) are sketched in Figure 15. Note that
u(x1, x2)
"" ! 0.6u%(x ) # 0.1u%(x )u (x )

(13

k3 = 1 k1 k2 = 0.1
Hence, Fruits mul$a&ribute u$lity func$on is

u(x1 , x2 ) = 0.6u1 (x1 ) + 0.5u2 (x2 ) 0.1u1 (x1 )u2 (x2 )

Note:
u(x1 , x2 )
= 0.6u1' (x1 ) 0.1u11 (x1 )u2 (x2 )
x1

u1(x1)
1.00
.75
.50

.25
0
10

20

30

40

50

x1(%)

(a) Market share

u2(x2)
1.00
.75
.50
.25
FIGURE

15

u1(x1) and u2(x2) for

Fruit Computer

0
5

10

15

20

25

30

x2(millions of $)

(b) Profit

Suppose that for k1 ! 0.6, Fruit is indifferent between these two lotteries. Similarly, k2 is

Use of mul$a&ribute u$lity func$on

Suppose that Fruit must determine whether to
mount a small or large adver$sing campaign
during the coming year.
Fruit believes there is probability that CSL
(main rival) will mount to a small TV ad
campaign and probability to a large
campaign.

E(U for small ad campaign) " (!12!)(.549) # (!12!)(.35

E(U for large ad campaign) " (!12!)(.572) # (!12!)(.47

Thus, during the current year, Fruit should mount a large ad cam
TA B L E

12

Effect of Advertising on Market Share and Profit

CSL Chooses
Fruit Chooses

Small ad campaign
Large ad campaign

EMS

Small Ad Campaign

Large Ad Campaign

25%, $16
35%, $8

15%, $12
25%, $10

Use of Multiattribute Utility Functions

To illustrate how a multiattribute utility function might be used, suppose that Fruit mu
determine whether to mount a small or a large advertising campaign during the comi
year. Fruit believes there is a !12! probability that its main rival, CSL Computers, will mou
a small TV ad campaign and a !12! probability that CSL will mount a large TV ad campaig
From
F
igure
1
5:
At the end of the current year, Fruits market share and profits (in millions of dollars) w
be
as shown
in Table
12. Fruit must determine which of the following lotteries has a larg
u1 (15)
= 0.125,u
1 (25) = 0.375,u1 (35) = 0.625
expected utility: From Figure 15, we find that u1(15) " 0.125, u1(25) " 0.375, u1(35)
u2 (8) = 0.45,u2 (10) = 0.53,u2 (12) = 0.58,u2 (16) = 0.70.
0.625,
u2(8) " 0.45, u2(10) " 0.53, u2(12) " 0.58, and u2(16) " 0.70. Then
u(25%, $16)
u(15%, $12)
u(35%, $8)
u(25%, $10)

"
"
"
"

0.6(.375)
0.6(.125)
0.6(.625)
0.6(.375)

#
#
#
#

0.5(.7) $ 0.1(.375)(.7) " .549

0.5(.58) $ 0.1(.125)(.58) " .358
0.5(.45) $ 0.1(.625)(.45) " .572
0.5(.53) $ 0.1(.375)(.53) " .470

Then
E(U for small ad campaign) " (!12!)(.549) # (!12!)(.358) " .454
E(U for large ad campaign) " (!12!)(.572) # (!12!)(.470) " .521
Thus, during the current year, Fruit should mount a large ad campaign.