Question
John is employed by a manufacturing company, but because of the predictions of global recession from the end of 2022 to 2023, is unsure if
John is employed by a manufacturing company, but because of the predictions of global recession from the end of 2022 to 2023, is unsure if he will keep his job. His income (Y) from the current job is R90,000. There is an 80% probability that he will keep the job and earn this income. However, there is a 20% probability that he will be laid off and will be out of work for a long time. The lay-off will force him to accept a lower paying job. In this case, her income is R10,000. i) Show that John`s expected value of his income is thus R74,000. (1 mark) ii) John`s utility function is given by 100 0.0001 2 , 1) Graph the utility function (4 marks) 2) determine the value of the insurance (risk premium) required to the purchase insurance policy. Please interpret the risk premium.
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