Analyze case 1 with in accordance with the notes provided

Case 1.Income and Risk

Two types of temporary job contract for one year are offered to you. Type 1 job

depends on the achievement of your performance, where you can earn a 200,000 Yen

monthly wage if you achieve a pre-specified goal, or you can earn 100,000 Yen if

you fail to achieve the goal. Achievement of the goal depends on good luck or bad

luck with 50-50 percent possibility of achieving it each month. The other type of job

contract offers you a fixed wage of 151,000 Yen, but has a slim chance of 1 percent

of removal into reserve with only 51,000 Yen compensation. Which of the two job

contracts do you choose and why? Do you maximize the average wage or minimize

risk associated with job contracts? Calculate your expected income and the degree of

uncertainty of your wage. Discuss your decision making.

Hint: Ch.5 of Pindyck and Rubinfeld, Microeconomcs 8-th ed., 2013.

Reading Notes: Expected Utility Theory

People often face decision making under uncertainty. Popular method to understand

this behavior is the utility function and the expected utility theory. Suppose you face the

following three gambles with a combination of income and uncertainty. Assume you are

Individual 1 with Figure 1 utility function. Examine your mean value (MV) of each gamble

based on probability and income you can earn (US$).

First, you attempt to maximize the average income (MV) based on equation (1)

MV = P1 X1 + P2 X2 (1)

Second, you attempt to maximize utility associated with income you can earn. Under

certain conditions, your expected utility (EU) is calculated as the following equation:

EU = P1 U(X1

) + P2 U(X2

) (2)

Based on expected utility, you will choose gamble 2, 1, and 3 in this order because the

corresponding expected utility is higher in this order.

pclated with income you can earn. Under certain conditions, your expected utility (EU) is calculated as the following equation: EU = P, U(X,) + P2 U(X2) (2) Based on expected utility, you will choose gamble 2, 1, and 3 in this order because the corresponding expected utility is higher in this order. Figure 1 Utility Function Figure I Utility Function of an Individual 1 15.000. 1,00 0.90 0.80 0.70 5,500 0.67 0.60 3.50 2.000, 0.50 T 0.40 1.30 4.0010 320 17.500. 0.OO -7.500 2.500 2.500 7.500 12.500Note 1. Expected Utility Theory People often face decision making under uncertainty. Popular method to understand this behavior is the utility function and the expected utility theory. Suppose you face the following three gambles with a combination of income and uncertainty. Assume you are Individual 1 with Figure 1 utility function. Examine your mean value (MV) of each gamble based on probability and income you can earn (US$) First, you attempt to maximize the average income (MV) based on equation (1) MV = P1 X1 + P2 X2 (1) Second, you attempt to maximize utility associated with income you can earn. Under certain conditions, your expected utility (EU) is calculated as the following equation: ase Cover & Assignme.. EU = P, U(X,) + P2 U(X2) (2) RIGULUM Based on expected utility, you will choose gamble 2, 1, and 3 in this order because the corresponding expected utility is higher in this order. Figure 1 Utility Function PDF Figure 1 Utility Function of an Individual 1 rate Governance 15,000. 1.00 0.90 0.80 e Financial Crisis Corporate Governance 070 5.500. 0.67 0 80 0 50 2.000 0.50 T 040 0 30 -4,0000 8020 POF PDF 0.10 -7,500 , 0,00 -7 500 2.500 2,500 7.500 12 500 ctsheet-RolesNote 1. Expected Utility Theory People often face decision making under uncertainty. Popular method to understand this behavior is the utility function and the expected utility theory. Suppose you face the following three gambles with a combination of income and uncertainty. Assume you are Individual 1 with Figure 1 utility function. Examine your mean value (MV) of each gamble based on probability and income you can earn (US$). First, you attempt to maximize the average income (MV) based on equation (1) MV = P1 X1 + P2 X2 (1) Second, you attempt to maximize utility associated with income you can earn. Under certain conditions, your expected utility (EU) is calculated as the following equation: EU = P, U(X,) + P2 U(X2) (2) Based on expected utility, you will choose gamble 2, 1. and 3 in this order because the corresponding expected utility is higher in this order. Figure 1 Utility Function POF Figure 1 Utility Function of an Individual 1 100 15.000 1.00 0.90 he Financial Gas 0:70 5.500 . 0 67 060 050 2 000 0 50 0 40 0 30 4.0600 020 PDF