3. In the upcoming year, the income from your current job will be $50,000. There is a 0.5 chance that you will keep your job and earn this income, and 0.2 chance that you will get a rise and earn 75,000. However, there is 0.3 chance that you will be laid off, putting you out of work for a time and forcing you to accept a lower paying job. In this case, your income is $25.000. The expected value of your income is thus $47,500. a) If your utility function has the formula 5001 -0.00027², determine the risk premium associated with this lottery. b) Provide an interpretation of the risk premium in this particular example.

3. In the upcoming year, the income from your current job will be $50,000. There is a 0.5 chance that you will keep your job and earn this income, and 0.2 chance that you will get a rise and earn 75,000. However, there is 0.3 chance that you will be laid off, putting you out of work for a time and forcing you to accept a lower paying job. In this case, your income is $25.000. The expected value of your income is thus $47,500. a) If your utility function has the formula 5001 -0.00027², determine the risk premium associated with this lottery. b) Provide an interpretation of the risk premium in this particular example.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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