Johnny Football has a utility function of the form ? = √?. Johnny is beginning his senior year of college football. If he is not seriously injured, he will receive a $1,000,000 contract for playing professional football. If any injury ends his football career, he will take a job as a refuse removal facilitator in his hometown that pays $10,000. There is a 10% chance that Johnny will be injured badly enough to end his career. a. What is Johnny’s expected utility? b. How much would Johnny be willing to pay to remove the financial risk he faces? That is, what $p would he pay for a $1,000,000 insurance policy so that he would have $1,000,000-$p even if he had a serious injury? Assume he wouldn’t work for $10,000 if he had the insurance and he was injured. Hint: You should set his utility with certainty (U($1,000,000-$p)) equal to his expected utility with risk (found in part a) and solve for p.

Johnny Football has a utility function of the form ? = √?. Johnny is beginning his senior year of college football. If he is not seriously injured, he will receive a $1,000,000 contract for playing professional football. If any injury ends his football career, he will take a job as a refuse removal facilitator in his hometown that pays $10,000. There is a 10% chance that Johnny will be injured badly enough to end his career. a. What is Johnny’s expected utility? b. How much would Johnny be willing to pay to remove the financial risk he faces? That is, what $p would he pay for a $1,000,000 insurance policy so that he would have $1,000,000-$p even if he had a serious injury? Assume he wouldn’t work for $10,000 if he had the insurance and he was injured. Hint: You should set his utility with certainty (U($1,000,000-$p)) equal to his expected utility with risk (found in part a) and solve for p.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.12P

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