Equations of the Expected Value Lines

Equations of the Expected Value Lines

Supposing that the probabilities of state #1 and state #2 are p₁, p₂, the expected value of payoff for the i-th alternative is

v_i1(1-p₂) + v_i2p₂ = v_i1 – v_i1p₂ + v_i2p₂ = v_i1 + (v_i2-v_i1)p₂

The last expression represents a line that connects points v_i1 on the left axis and v_i2 on the right axis (see Picture 2.3).