Suppose that you were granted a “risky job” of the type examined in this chapter.

The job pays $40,000 with probability 12 and $160,000 with probability 12

. What is your certainty equivalent for this risky payoff? To answer this question, compare this risky job to a safe job that pays $100,000 for sure. Then reduce the value of the safe job in $1,000 increments until you are indifferent between the safe job and the risky job. What is your certainty equivalent for a job paying $10,000 or $190,000, each with equal probability?