PLZ EXPLAIN 2 Suppose in a good month you earn $2500 and in a bad month you earn

Question

PLZ EXPLAIN

2 Suppose in a good month you earn $2500 and in a bad month you earn $900. Good and bad months have respective probabilities of 75% and 25% (a) What is your average or expected monthly income? ( marks) E(I) -.75x2500 + .25x900- 2100 Suppose your utility function is U = (1)0.5, where l is your income in a given mo nth b) Calculate your expected utility in a given month. (5 marks) E(U) = (75)(2500), (25)(900), 45 U = E(1)0.5-21 00^ 0.5 15.826. (d) Based on your answers in (b) and (c) wh at is your attitude toward risk? (5 marks) Since the utility of expected income is bigger than the expected utility, you are risk-averse Suppose an insurance company offers to pay you $396 if you have a bad month, but charges you SX if you have a good month 15 e) How much at most are you willing to pay in a good month? (Hint: You pay SX in a good month so that you are equally happy buying or not buying the insurance.) (5 marks) E(U) = .75(2500-X),5 + .25(900 + 396).5 = 45. So, X-196.

Explanation / Answer

The above answer is correct

Where, Expected income = probability of good month * earnings in good month + probability of bad month*earnings in bad month

Probability of good month is 75% meaning 0.75 and probability of bag nite is 25% meanibg 0.25

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