Question: John has a von Neumann Morgenstern utility function given by U

John has a von Neumann–Morgenstern utility function given by U = √M, where M is his income. If he becomes an economics professor, he will make M = 81/ yr with probability 1. If he becomes an attorney, he will make M = 900/yr if he becomes a partner in a Wall Street firm, but only M = 25/yr if he fails to make partner. The probability of his becoming a partner is 0.2. Smith is an infallible judge of legal talent. After a brief interview, he can state with certainty whether John will become a partner. What is the most John would be willing to pay for this information? (Set up the relevant equation. You don’t need to solve it.)

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  • CreatedDecember 12, 2014
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