(6)

(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 below the certain sum of money which would make you indifferent between whether you received it or the lottery ticket.

$……

We will now refer to this sum of money as X. The utility of X is 0.5.

(ii) You are now offered a lottery ticket which offers you a 50% chance of $ ……… (enter X here) and a 50% chance of $0. Alternatively, you will receive a sum of money for certain. Write down below the certain sum of money which would make you indifferent between whether you received it or the lottery ticket.
$……
The utility of this sum of money is 0.25.
(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 $………(enter X here). Write down below the certain sum of money which would make you indifferent between whether you received it or the lottery ticket.
$……
The utility of this sum of money is 0.75.

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

(c) Discuss the strengths and limitations of the assessment procedure used in (a).