Question

4. Leia has a utility function given by U = 1 – 1/M, where M is the present value of her lifetime income. If Leia becomes a teacher, she will make M=5 with probability equal to 1. If Leia becomes an actress, she will make M=400 if she becomes a star, but only M=2 if she fails to become a star. a. Calculate Leia’s expected utility if she were to become a teacher b. Calculate Leia’s expected utility if she were to become an actress c. Compare the expected utilities of Leia becoming an actress and a teacher. Which would she choose?

Answer 1

the above images expected utility of Leia when she becomes a teacher and when she becomes an actress.

C) now if Leia becomes a teacher then her utility will be 0.8 which is fixed and for sure she will get this utlity but if she becomes an actress then there are two chances that whether she becomes an actress or she may not be successful .. but if she is not successful then she will never get utility as of a teacher. But if she is successful then she will more utility then a teacher that is 0.9975 which is near to one and then other utlity she can acquire so it is risky for her to grab that utlity also. So becoming a teacher is less risky then this. So she should choose to become ba teacher as it is full probability that she can get utility from it