Question

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. We assume the doctor's utility of income function is given as: U(I) = I^0.5, where I represents income.

Outcomel | Outcome 2 Job Choice Prob. Income Prob. Income 0.95 $100,000 0.05 $60,000 Work for ΗΜΟ Own practice Research $250.000 0.8 $30,000 0.1 $500,000 0.9 $50,000

Refer to Scenario 5.6. The expected utility of income from Own practice is

Answer 1

The expected utility of income from Own practice is

0.2*u(250,000)+ 0.8* u(30,000).

= 0.2*(250,000)^0.5 + 0.8*(30,000)^0.5

= 100 + 138.56

= $ 238.56