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 - 0.0002/, 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 - 0.0002/, determine the risk premium associated with this lottery. b) Provide an interpretation of the risk premium in this particular example.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![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 - 0.0002f, determine the risk
premium associated with this lottery.
b) Provide an interpretation of the risk premium in this particular example.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc4170c18-1004-489a-bed9-220060137fbc%2Fe3518b6f-3599-4af8-a31d-38d4cb716ffa%2Ftp0yjic_processed.png&w=3840&q=75)
Transcribed Image Text: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 - 0.0002f, determine the risk
premium associated with this lottery.
b) Provide an interpretation of the risk premium in this particular example.
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