An employer has hired Freddy and the current compensation contract gives Freddy $6,600 with prob. 0.3 and $1,550 with prob. 0.7. Assume Freddy is risk averse, with the utility function u(x) = x0.5. The employer is considering changing the contract so that Freddy is paid a fixed X, where X is equal to the expected value of the current contract In this
An employer has hired Freddy and the current compensation contract gives Freddy $6,600 with prob. 0.3 and $1,550 with prob. 0.7. Assume Freddy is risk averse, with the utility function u(x) = x0.5. The employer is considering changing the contract so that Freddy is paid a fixed X, where X is equal to the expected value of the current contract In this
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
![An employer has hired Freddy and the current
compensation contract gives Freddy $6,600
with prob. 0.3 and $1,550 with prob. 0.7.
Assume Freddy is risk averse, with the utility
function u(x) = x0.5. The employer is
%3D
considering changing the contract so that
Freddy is paid a fixed X, where X is equal to the
expected value of the current contract. In this
case, Freddy's exp. utility from the current
contract is while his exp. utility under the
fixed contract would be
O 51.93; 55.4
O 51.93; 56.77
O 48.83; 55.4
O 48.84; 56.77](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fefb3926d-a816-4971-85e9-1f0dbdf5436e%2F5422741a-3349-4940-b92a-ffba9e199bad%2F91fw0p_processed.jpeg&w=3840&q=75)
Transcribed Image Text:An employer has hired Freddy and the current
compensation contract gives Freddy $6,600
with prob. 0.3 and $1,550 with prob. 0.7.
Assume Freddy is risk averse, with the utility
function u(x) = x0.5. The employer is
%3D
considering changing the contract so that
Freddy is paid a fixed X, where X is equal to the
expected value of the current contract. In this
case, Freddy's exp. utility from the current
contract is while his exp. utility under the
fixed contract would be
O 51.93; 55.4
O 51.93; 56.77
O 48.83; 55.4
O 48.84; 56.77
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