Page 6 of 6 4. Decision Making under Uncertainty (15 points) Kathryn received a job offer from GP which pays $10,000 per month. There is a 10% chance that GP will go bankrupt, in which case she will not receive her salary (i.e., her income will be zero). Alternatively, Kathryn considers starting her own consultancy with the following net payoffs: $6,400 per month with probability 70%, $14,400 per month with probability 20%, and zerA with probability 10%. Assume Kathryn's preferences are described by this utility function: U(I) = VI, where I denotes income. (a) (4 points) Which of the two occupations does Kathryn prefer? (b) (4 points) Assume that Kathryn decided in favor of starting her own consultancy. However, just before registering her business, SSB Consultant Inc. offered Kathryn a job with a fixed salary. What amount of fixed salary from SSB would make Kathryn Indifferent between starting her own consultancy and acceptring the offer from SSB (c) (4 points) Calculate Kathryn's risk premium. (d) (3 points) Briefly explain the economic meaning of Kathryn's risk premium