Suppose that Betsy’s utility function is given by the equation U=Y0.3 where Y is measured in thousands of dollars. Betsy’s current job pays her $20,000 per year and she can earn this amount next year with certainty. Betsy is offered a different job but in this new job, Betsy has a 50%
chance of earning $36,000 and a 50% chance of earning only $15,000.
a) Should Betsy take the new job?
b) Does your answer change if Betsy’s utility function is U=Y0.9? Why?
c) Does your answer change if Betsy’s utility function is U = Y1.25? Why?
My answer:
A)
0.5(36,000) + 0.5(15,000)
=$25,000
B)
0.5(36,000)^0.3 + 0.5(15,000)^0.3
= 20.58
0.5(36,000)^0.9 + 0.5(15,000)^0.9
=9,013.70
C)
0.5(36,000)^1.25 + 0.5(15,000)^1.25
= 330,942.01
I feel that the numbers seem wrong?? Please help!
1 answer