MICRO Doubt

[Shefali]

pls help me with the 2nd part..

[Shefali]

someone pls help

[Granpa Simpson]

Q1) Since the agent is Risk Averse he will take the utility from the expected wealth in Law Profession and compare it with the utility from getting a Job of 62000, in this case he his utility from expected wealth in law profession is=(62500)^(1/2) while utility obtained from getting a secured job=(62000)^(1/2)..clearly utility is more if he chooses law profession.
Q2) Since the person is Risk Averse he will take in to account the worst situation i.e. he does not get a partner and compare it with a secured one i.e. 62000...so maximum premium that he would pay is (62000-45000)=Rs 17000.
Q3) The IC's will be upward sloping and concave to the origin.
However plz do check...!!!!

[Shefali]

Subhayu...the answer to 2nd part is 1254
3rd is ryt..

[Granpa Simpson]

Sorry I dint notice that its given "the option is no longer available to him"..let me calculate..il let u knw..!!!

[Shefali]

okk...hw did u get that 62500 value?

[Granpa Simpson]

it is the value of the expected wealth...!!!

[Homer Simpson]

Hmm, i am getting a completely different answer - 18,496 worth of premium

EU (from gamble) = 248 (approx)

meaning L = 61504 (with certainty and same EU)
Thus premium = 80000 - 61504 = 18496

[kangkan]

i tink it will depend on the trade off between risk and return that the person is willing to accept?is there a preceeding part tin the question?