Question: 15.5. Suppose that you have a utility function given by the equation Consider a lottery that provides a payoff of $0 with probability 0.75 and

15.5. Suppose that you have a utility function given by the equation Consider a lottery that provides a payoff of $0 with probability 0.75 and $200 with probability 0.25.

a) Sketch a graph of this utility function, letting I vary over the range 0 to 200.

b) Verify that the expected value of this lottery is $50.

c) What is the expected utility of this lottery?

d) What is your utility if you receive a sure payoff of $50?

Is it bigger or smaller than your expected utility from the lottery? Based on your answers to these questions, are you risk averse?

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