Andrew is considering taking one of two jobs. The first job pays $90,000 as base pay, but there is a 25% chance of getting a further bonus of $54,400. The second job pays $102, 500 for sure. Andrew is risk averse, and his utility from income is v(I) = √I. (a) What is the lottery over income levels that Andrew faces if he takes the first job?
Andrew is considering taking one of two jobs. The first job pays $90,000 as base pay, but there is a 25% chance of getting a further bonus of $54,400. The second job pays $102, 500 for sure. Andrew is risk averse, and his utility from income is v(I) = √I. (a) What is the lottery over income levels that Andrew faces if he takes the first job?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Andrew is considering taking one of two jobs. The first job pays $90,000 as
base pay, but there is a 25% chance of getting a further bonus of $54,400.
The second job pays $102, 500 for sure. Andrew is risk averse, and his utility
from income is v(I) = √I.
(a) What is the lottery over income levels that Andrew faces if he takes
the first job?
(b) What is the expected value of Andrew's income if he takes the first job.
(c) Which job gives a higher expected utility.
(d) Suppose it is possible to buy insurance against the risk of not getting the
bonus. The insurance company charges a premium and pays Andrew](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbd73f481-1117-4994-a07a-c590790d1835%2F173e1563-0006-4bcb-8137-bacecc70dd21%2Feyn79a_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Andrew is considering taking one of two jobs. The first job pays $90,000 as
base pay, but there is a 25% chance of getting a further bonus of $54,400.
The second job pays $102, 500 for sure. Andrew is risk averse, and his utility
from income is v(I) = √I.
(a) What is the lottery over income levels that Andrew faces if he takes
the first job?
(b) What is the expected value of Andrew's income if he takes the first job.
(c) Which job gives a higher expected utility.
(d) Suppose it is possible to buy insurance against the risk of not getting the
bonus. The insurance company charges a premium and pays Andrew
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