1.2. Karma’s income next year is uncertain: there is a 60%

probability she will make $22,000 and a 40% probability she will make $35,000. The accompanying table shows some income and utility levels for Karma.

a. What is Karma’s expected income? Her expected utility?

b. What certain income level leaves her as well off as her uncertain income? What does this imply about Karma’s attitudes toward risk? Explain.

c. Would Karma be willing to pay some amount of money greater than zero for an insurance policy that guarantees her an income of $26,000? Explain.

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Income Total utility (utils) $22,000 850 25,000 1,014 26,000 1,056 35,000 1,260