The directors of Gatimu Ltd are in the process of establishing shareholders

utility function. They have approached Mr. Kilo, the principle shareholder

and given him the following lotteries:-

0

0.5 chance of receiving Sh. 0 and 0.5 chance of receiving Sh.

100,000. He is willing to pay a maximum of Sh. 45,000 for this

lottery.

1

0.4 chance of receiving Sh.45,000 and 0.6 chance of receiving

Sh.100,000. He is willing to pay a maximum of Sh. 85,000 for this

lottery.

2

0.3 chance of receiving Sh. 0 and 0.7 chance of receiving Sh.

45,000. He is willing to pay a maximum of Sh. 30,000 for this

lottery.

Assume that utile values of 0 and 1 are assigned to a pair of wealth

representing the two extremes (Sh 0 and sh. 100,000 respectively).

REQUIRED

Compute the utile value of Sh. 45,000, Sh. 85,000 and Sh 30,000.

Construct the utility function

of Mr. Kilo and state his risk attitude.

(10

marks ( I would appreciate to get the whole question done for my studies)