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 i nsurance 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 (well over the minimum required) AND $2 Powerball tickets. Draw a graphical representati on 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

attached is the graph

assuming

U0 =Expected level pf utility

U1= Utility from insurance

U2= Utility from power tickets

U3= Utility from expected loss and gain

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