Question

16.Suppose the utility function of Nathasha was given U(I)=(ROOT10I). Where' I' represents annual income (in $1,000).

Let's say she has a current income of $40,000 (I=40) and is sure to make the same income next year. She has a new job. New jobs have a 0.6 chance of earning $44,000 and a 0.4 chance of earning $33,000. Should she take this job?why?

Answer 1

Answer:
If income of Nathasha is $40,000 then new utility will be given by :

• Case 1. When Annual Income = $40000
  Utility (I)= root 10i
  Value of root 10= 3.162
  U (i)= 3.162 *40000
  = $126,480
  It means utility of $ 40,000 is $ 126,480
  
• Case 2. When Annual Income= $44,000
  Value of root 10= 3.162
  U (i)= 3.162 *44000
  = $139,128
  It means utility of $ 44,000 is $ 139,128
  
• Case 3. When Annual Income= $33,000
  Value of root 10= 3.162
  U (i)= 3.162 *33000
  = $104,346
  Above analysis show the utility as more than $100,000

From above analysis its clear that it's better to take the change where possibility of getting the job is 0.6% as if she did not get it there is nothing to loose.

(plz give me a thums up...if my answer helped you and if any suggestion plz comment, Yr thums up boost me)