Question 1

Suppose that Nita’s utility function is given by **u(I) = (10I)^(0.5)** , where **I** represents annual income in thousands of dollars. Suppose that Nita is currently earning an income of \$40,000 (*I* = 40) and can earn that income next year with certainty. She is offered a chance to take a new job that offers a 0\.6 probability of earning \$44,000 and a 0.4 probability of earning \$33,000.\ Based on the above data, answer the given subquestions. Nita’s risk preferences are Suppose that Nita’s utility function is given by **u(I) = (10I)^(0.5)** , where **I** represents annual income in thousands of dollars. Suppose that Nita is currently earning an income of \$40,000 (*I* = 40) and can earn that income next year with certainty. She is offered a chance to take a new job that offers a 0\.6 probability of earning \$44,000 and a 0.4 probability of earning \$33,000.\ Based on the above data, answer the given subquestions. Should Nita take up the new job? Suppose that Nita’s utility function is given by **u(I) = (10I)^(0.5)** , where **I** represents annual income in thousands of dollars. Suppose that Nita is currently earning an income of \$40,000 (*I* = 40) and can earn that income next year with certainty. She is offered a chance to take a new job that offers a 0\.6 probability of earning \$44,000 and a 0.4 probability of earning \$33,000.\ Based on the above data, answer the given subquestions. If Nita is willing to join the new job and also to buy insurance to protect against the variable income associated with the new job, how much would she be willing to pay for that insurance (in \$)?\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_