1.Mayor-elect Franklin is indifferent about whether to keep a $100,000 property tax revenue surplus or use it to develop a tax abatement district on 2nd Street (past Route 37) in order to attract new business to the city. If the new businesses that locate there are successful, $700,000 in additional tax revenues will be collected by the city. If those new businesses fail, the city coffers will lose the entire $100,000 surplus and no new taxes will be collected. Prior to making his decision, Franklin determines that tax abatement districts are successful 15% of the time.

What is Mayor-elect Franklin's utility of $100,000?

2.Mayor-elect Franklin is also indifferent between keeping the $100,000 surplus and giving bonuses to city employees. Franklin believes that bonuses paid to public sector employees result in a 20% increase to their productivity (which would save the city an additional $250,000 after the bonuses are paid) when they are effective. Studies on bonuses given to employees of similar sized cities show that the hoped for productivity gains occur 60% of the time.In other words the bonuses paid are only effective 60% of the time.

NOTE: You need to know the answer to Question 1 in order to answer Question 2

a.What is Mayor-elect Franklin's utility of $250,000?

b.Graph Mayor-elect Franklin's utility curve. (Do it accurately and carefully. Points will be deducted for negligence)

c.Is Mayor-elect risk averse or risk taker? What attitude do you think is desired for public policy decision maker?