Suppose an Employee has the utility function where x stands for income in dollars. There are two...

Suppose an Employee has the utility function where x stands for income in dollars. There are two employment options available. Option A is receiving $2200 for sure. Option B on the other hand depends on the overall success in the market. If everything goes well in the economy, the Employee will receive $3600. Everything will go well in the economy with probability 0.6. If things do not go well, then the Employee will only be paid $400.

a) Graph the Employee’s utility function. Is the Employee risk averse? Explain.

b) Which option offers the Employee the highest expected return? Calculate.

c) Which option offers the highest expected utility to the Employee? Calculate. Which option will the Employee choose?

Expert Solution

Rahul Sunny answered 2 years ago

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Suppose an Employee has the utility function where x stands for income in dollars. There are two...

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