You wish to construct your personal utility function u(M)

for receiving M thousand dollars. After setting u(0) 0, you next set u(1) 1 as your utility for receiving $1,000. You next want to find u(10) and then u(5).

(a) You offer yourself the following two hypothetical alternatives:

A1: Obtain $10,000 with probability p.

Obtain 0 with probability (1 p).

A2: Definitely obtain $1,000.

You then ask yourself the question: What value of p makes you indifferent between these two alternatives? Your answer is p 0.125. Find u(10).

(b) You next repeat part

(a) except for changing the second alternative to definitely receiving $5,000. The value of p that makes you indifferent between these two alternatives now is p 0.5625. Find u(5).

(c) Repeat parts

(a) and (b), but now use your personal choices for p.