After graduating, Sallie Handshake's best job offer will either be with a Big-8 accounting firm for...

 

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After graduating, Sallie Handshake's best job offer will either be with a Big-8 accounting firm for $160,000 a year or as a State Farm agent in Grand Rapids, Michigan, for $40,000 a year. She can increase the probability of the former outcome by studying more, but such studying has its costs. If Ś represents her amount of studying (where S = O is no study and S = 1 is all-out effort), her probability of getting the job with a Big-8 firm just equals S. Her utility depends on how hard she studies and her subsequent annual income Y. She tries to maximize the expected value of the von Neuman-Morgenstern utility function U(S, Y) = Y - 400S2. If she chooses S to maximize her expected utility, how much will she study? !! After graduating, Sallie Handshake's best job offer will either be with a Big-8 accounting firm for $160,000 a year or as a State Farm agent in Grand Rapids, Michigan, for $40,000 a year. She can increase the probability of the former outcome by studying more, but such studying has its costs. If Ś represents her amount of studying (where S = O is no study and S = 1 is all-out effort), her probability of getting the job with a Big-8 firm just equals S. Her utility depends on how hard she studies and her subsequent annual income Y. She tries to maximize the expected value of the von Neuman-Morgenstern utility function U(S, Y) = Y - 400S2. If she chooses S to maximize her expected utility, how much will she study? !!

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Solution The Vnm expected utiitky substituting have income with val... View the full answer