Questions 13-15: In the upcoming year, the income from your current job will be $90,000. There is a 0.8 chance that you will keep your job and earn this income. However, there is 0.2 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 $10,000. The expected value of your income is thus $74,000. Your utility function has the form U = √I. • What is your expected utility from the lottery?

Questions 13-15: In the upcoming year, the income from your current job will be $90,000. There is a 0.8 chance that you will keep your job and earn this income. However, there is 0.2 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 $10,000. The expected value of your income is thus $74,000. Your utility function has the form U = √I. • What is your expected utility from the lottery?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Economics

D
Question 14
. What is the certainty equivalent?
o CE = [val2]
Question 15
. What is the risk premium?
o RP = [val3]

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