In: Economics
Suppose a person has the utility function U=x^.75 and makes $52,000. If he gets the flu, he will have to miss work for a week, costing him $1,000. His probability of getting the flu is 15%. Compare the following scenarios and rank his preferences over them:
Which makes him best off?
Group of answer choices
Situation 1
Situation 4
Situation 3
Situation 2
1)
Current situation=Situation 1
Expected utility=0.15*U(52000-1000)+(1-0..15)*U(52000)
Expected utility=0.15*(52000-1000)^0.75+(1-0.15)*(52000)^0.75=3436.05 utils
2)
Situation 2- Sick day program
Expected Utility=0.15*U(52000-500)+(1-0..15)*U(52000-500)
Expected utility=0.15*(52000-500)^0.75+(1-0..15)*(52000-500)^0.75=3418.66 utils
3)
Situation 3- buy a flu shot for $75
Expected Utility=0.10*U(52000-75-1000)+(1-0.1)*U(52000-75)
Expected Utility=0.10*(52000-75-1000)^0.75+(1-0.1)*(52000-75)^0.75=3434.81 utils
4)
Situation 4- buy a flu shot for $100
Expected Utility=0.05*U(52000-100-1000)+(1-0.0.05)*U(52000-100)
Expected Utility=0.05*(52000-100-1000)^0.75+(1-0.05)*(52000-100)^0.75=3436.06 utils
Expected utility is highest in case of situation 4. It will make him best off
Correct option is
Situation 4