Post by: redpassion on Nov 23, 2022
The graph shows the relationship between income and utility for Ahab.
Assume that U1=170, U2=187, U3=243, U4=255, I1=$29,000, I2=$35,000, I3=$59,000, and I4=$65,000.
Suppose Ahab is offered two different jobs. For the first job, he will earn $35,000 a year. For the second job, he has a 30% chance of earning $29,000 a year and a 70% chance of earning $59,000 a year. What is the expected value of the second job? What is the expected utility of the second job?
Please round your final answer to two decimal places.
◦ $38,000.00, 221.10
◦ $50,000.00, 191.90
◦ $38,000.00, 191.90
◦ $50,000.00, 221.10
Post by: ad2018 on Nov 23, 2022
The expected value of the second job is the sum of the payoffs associated with each possible outcome of a situation weighted by its probability of occurring.
Expected Value = Probability of low earnings*Low Earnings + Probability of high earnings*High Earnings = (30/100)*29,000 + (70/100)*59,000 = 0.3*29,000 + 0.7*59,000 = $50,000.00
The expected utility of the second job is the sum of the utilities associated with each possible outcome of a situation weighted by its probability of occurring.
At the low wage ($29,000), Ahab has a utility of U1 (170).
At the high wage ($59,000) Ahab has a utility of U3 (243).
Expected Utility = Probability of low earnings*Utility from low earnings + Probability of high earnings*Utility from high earnings = (30/100)*170 + (70/100)*243 = 0.3*170 + 0.7*243 = 191.90.