Hi!

I completed most of this question but am stuck on part of it could you help me make sure it is correct:

a. Use the following questions to assess your own utility function for money values between $0 and $5000. You should assume that all sums of money referred to will be received immediately.

i. You are offered either a sum of money for certain or a lottery ticket that will give you a 50% chance of winning $5000 and a 50% chance of winning $0. Write down the certain sum of money which would make you indifferent between whether you received that sum of money or the lottery ticket. We will refer to that sum of money as X. The utility of X is 0.5.

$2000

ii. You are now offered a lottery ticket which offers you a 50% chance of $X (from part a) and a 50% chance of $0. Alternatively, you will receive a sum of money for certain. Write down the certain sum of money which would make you indifferent between whether you received that sum of money or the lottery ticket. The utility of this sum of money is 0.25.

$920

iii. Finally, you are offered a sum of money for certain or a lottery ticket which will give you a 50% chance of $5000 and a 50% chance of $X (from part a). Write down the certain sum of money which would make you indifferent between whether you received that sum of money or the lottery ticket. The utility of this sum of money is 0.75.

$3300

b. Plot your utility function and discuss what it reveals. (100 word limit)

Monetary value: $0 $920 $2000 $3300 $5000

Utility 0 .25 .5 .75 1.0

When plotting this utility function on a graph it is seen that the person making the decision is risk seeking for this range of range of monetary values. The curve could, of course, also be used to estimate the utilities of other sums of money.

c. Discuss the strengths and limitations of the assessment procedure used in question 1. (100 word limit)

d. After eliciting and analyzing your utility function, do the same thing for someone who you believe has significantly different attitudes toward risk than you do. Plot their utility function.

e. Using the two utility functions decide how you and the other person would respond to the following gamble: $1500 for certain OR lottery ticket with 50% chance of $3000 and 50% chance of $1000.

Expect $ value of gamble = .50($3000) + .50(1000) = 1500 + 500 = $2000

I would go with the 50% chance since you would be getting $500 more than if you pick $1500. If you are not will to risk anything then you would just go for the $1500 for certain, but if you are willing to make a little bit of a risk then you will make more money.

2. Identify the heuristics that decision makers might use in making estimates in the situations listed below. Explain how biases might emanate from the use of these heuristics. (250 word limit for each scenario please)

a.A marketing manager of a company manufacturing computer peripherals making a forecast of the number of new orders that will be obtained next month.

b.The manager of a manufacturing company estimating the relative probability of (i) a strike at the companys Pittsburgh plant in the next year and (ii) the company experiencing a long-term loss of market share following a strike over pay at its Pittsburgh plant in the next year.