All licensed drivers are required by law to purchase a minimum level of auto and

Question

All licensed drivers are required by law to purchase a minimum level of auto and motorcycle insurance (well, if they own either of the two). However, the vast majority choose to buy much more insurance than the required minimum. It's also true that millions of people each day purchase lottery tickets, which universally carry a negative expected value. Meet Kevin. Kevin has initial wealth of M0 = 1000, and he buys both motorcycle insurance for his Harley Dyna Wide-Glide AND $2 Powerball tickets. Draw a graphical representation of Kevin's utility function (label his potential loss from a car accident as ML and his potential gain from the lottery ticket as MH, and use expected value lines to show that his risk preferences regarding his bike and regarding his consumption of lottery tickets). I am asking for a single graphical utility function.

Explanation / Answer

If we want to develop a utility graph , X axis represents the amounts of goods consumed and y axis determines the total utility

Whenever a person buys a particular things he has the maximum utility in the first buy but when it will be purchased again the marginal utility will decrease. In this case expected values are the total utility that wil be gained from each of purchase.

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