Suppose that you graduate from college next year and you have two career options: 1) You will start a job in an investment bank paying a $100,000 annual salary. 2) You will start a Ph.D. in economics and, as a student, you will receive a $20,000 salary. You are bad with decisions, so you are letting a friend of yours decide for you by flipping a coin. The probabilities of options 1 and 2 are, therefore, each 50%. a) Illustrate, using indifference curves, your preferences regarding consumption choices in the two different states of the world. Assume that you are risk-averse. [Include also the 45 degrees line in your figure] b) Now show how the indifference curves would change if you were substantially more risk averse than before. Explain. c) Now show the indifference curves if you are risk neutral and if you are risk loving. d) Show your expected utility preferences from point a) mathematically

Suppose that you graduate from college next year and you have two career options: 1) You will start a job in an investment bank paying a $100,000 annual salary. 2) You will start a Ph.D. in economics and, as a student, you will receive a $20,000 salary. You are bad with decisions, so you are letting a friend of yours decide for you by flipping a coin. The probabilities of options 1 and 2 are, therefore, each 50%. a) Illustrate, using indifference curves, your preferences regarding consumption choices in the two different states of the world. Assume that you are risk-averse. [Include also the 45 degrees line in your figure] b) Now show how the indifference curves would change if you were substantially more risk averse than before. Explain. c) Now show the indifference curves if you are risk neutral and if you are risk loving. d) Show your expected utility preferences from point a) mathematically

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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