Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Should John choose to go to college? John wants to get a particular job 4 years from now. If he does not go to

 

Should John choose to go to college? John wants to get a particular job 4 years from now. If he does not go to college and earn a degree, he can get that job with 50% probability. If he goes to college and he graduates he can get that job with 80% probability. John's current wealth is $ 250,000 and the job will pay him a total present value of $1,000,000 over his lifetime. College will cost $ 90,000 in present value. If John does not go to college, he can get a lower paying job that will pay him a total of $ 250,000 in present value over his lifetime. John's utility is U = W (1/2) where (/2) means square root and W is John's net wealth (that is John's utility is the square root of his net wealth). Assume that the cost of studying for John is zero (he is very smart). A) Is John risk averse or not? How do you know? B) Do and show all the required calculations to decide whether John should go to college or not.

Step by Step Solution

3.45 Rating (165 Votes )

There are 3 Steps involved in it

Step: 1

A Johns utility function U W is a riskaverse utility function This means that John will prefer a cer... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Microeconomics An Intuitive Approach with Calculus

Authors: Thomas Nechyba

1st edition

538453257, 978-0538453257

More Books

Students also viewed these Accounting questions

Question

Describe three of Fechners psychophysical methods.

Answered: 1 week ago