Maggie must decide if she wants to open a start-up or work as an economics tutor. The business she is considering is risky because with 60% probability she earns $300 and with 40% probability she earns nothing. As an economics tutor she earns $160 with certainty. She has an initial wealth of $100 and her utility function is

U(C) = C

1.

What is Maggie's expected income from her start-up?

2.

What is Maggie's expected utility for opening the start-up?

3.

What is Maggie's certainty equivalent associated with opening the start-up?

4.

What is Maggie's risk premium for opening the start-up?

5.

Which activity should Maggie choose, according to Expected Utility Framework?

a. Opening the start-up.

b. Working as an economics tutor.

c. Cannot be decided due to lack of information.