Question

1. John is considering going to law school or business school. Law school yields a job that pays $80,000 a year with 40 percent probability (making partner) and $45,000 a year with 60 percent probability (getting stuck as an associate). Business school yields a job paying $120,000 a year 20 percent of the time (when the market is good) and $45,000 80 percent of the time (when the market is average). John’s utility over income is ?= Square root of "Salary".
   1. What is John’s expected income from going to law school? What is it from going to business school? Which is greater?
   2. What is John’s expected utility from going to law school? What about business school? Which is greater?

c. What decision to you expect John to make?

d. Is John risk averse?

Answer 1

e a John's expectation from going to low School - 80000/0.40+45000(0.6) 32000 + JF000 - 59000 John's Expected income from = 0.2 (1200oodt 0.8 Business School - 24000+ 3600 = 60000 b) John's EU fon law School = 0.4 (130000) + 0.6 ( 60oo. 113.13708498 & 127.2792206 - 240.416 30 35 936 John's Eu from Business School = 0.2 1120000 at 0.8 d ooo) -- 69.28 2032 + 169.7037 - 238.987 & John's prefer to go the expected union to is law school less. even though d) John is risk areuse. Yes