Johnny Football has a utility function of the form ? = √?. Johnny is beginning his senior year of college football. If he is not seriously injured, he will receive a $1,000,000 contract for playing professional football. If any injury ends his football career, he will take a job as a refuse removal facilitator in his hometown that pays $10,000. There is a 10% chance that Johnny will be injured badly enough to end his career. a. What is Johnny’s expected utility? b. How much would Johnny be willing to pay to remove the financial risk he faces? That is, what $p would he pay for a $1,000,000 insurance policy so that he would have $1,000,000-$p even if he had a serious injury? Assume he wouldn’t work for $10,000 if he had the insurance and he was injured. Hint: You should set his utility with certainty (U($1,000,000-$p)) equal to his expected utility with risk (found in part a) and solve for p.
***PLEASE NOTE: QUESTION HAS TWO PARTS REQUIRING ANSWER***
Q: Johnny Football has a utility function of the form ? = √?. Johnny is beginning his senior year of college football. If he is not seriously injured, he will receive a $1,000,000 contract for playing professional football. If any injury ends his football career, he will take a job as a refuse removal facilitator in his hometown that pays $10,000. There is a 10% chance that Johnny will be injured badly enough to end his career.
a. What is Johnny’s expected utility?
b. How much would Johnny be willing to pay to remove the financial risk
he faces? That is, what $p would he pay for a $1,000,000 insurance
policy so that he would have $1,000,000-$p even if he had a serious
injury? Assume he wouldn’t work for $10,000 if he had the insurance
and he was injured. Hint: You should set his utility with certainty
(U($1,000,000-$p)) equal to his expected utility with risk (found in
part a) and solve for p.
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