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.

Step 1

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

- Lottery l, with probability
*p*of winning $1 million and 1-*p*of getting $0. - 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:

Step 3

Using axio...

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