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?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Economics
![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?
Use "PS11 check your answers" to check your utility calculations. Use a
spreadsheet to avoid rounding errors.
o EU = [val1]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F41a11f92-ec66-4681-9866-6ecb7ea598eb%2F10ce6048-b1c8-4dec-90b6-e064c24a798b%2Fafq8ysc_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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?
Use "PS11 check your answers" to check your utility calculations. Use a
spreadsheet to avoid rounding errors.
o EU = [val1]
![D
Question 14
. What is the certainty equivalent?
o CE = [val2]
Question 15
. What is the risk premium?
o RP = [val3]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F41a11f92-ec66-4681-9866-6ecb7ea598eb%2F10ce6048-b1c8-4dec-90b6-e064c24a798b%2Fplvbgi_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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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