Set your utility for $0 to be 0 and $1 million to be 100.Apply the simple decision tree used in determining your utility formoney, where the lottery has a prize of $1 million if you win and $0 ifyou lose, to determine your utility for $500,000 and $200,000. Usethese 4 utilities to draw your utility curve for money.

Question
Asked Feb 25, 2019
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Set your utility for $0 to be 0 and $1 million to be 100.
Apply the simple decision tree used in determining your utility for
money, where the lottery has a prize of $1 million if you win and $0 if
you lose, to determine your utility for $500,000 and $200,000. Use
these 4 utilities to draw your utility curve for money.
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Expert Answer

Step 1

We device a simple decision tree with two alternatives for the decision maker.

  1. Lottery l, with probability p of winning $1 million and 1-p of getting $0.
  2. A certainty alternative of getting the outcome (B) of money "x" amount in our case lying between $500,000 and $200,000
Step 2

They want you to set your utility for $0 to be 0 and $1 million to be 100.

Therefore, utility for $500,000=50

and utility for $200,000=20

The tree diagram is shown on board:

 

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Step 3

Using axio...

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