Michael is still in high school, deciding on his future career path. Michael has two excellent talents, math and playing baseball. If Michael goes to college he will major in math, and then get a job as a math teacher. Because of the high demand for math teachers, Michael can expect with full certainty that he will get a job teaching math that pays $80,000 per year. Alternatively, Michael could skip college and become a baseball player. As a major league baseball player, his salary would be $10 million per year. If instead he never gets above the minor league teams, he only will earn $30,000 per year. In baseball: pr(major league) = .03, pr(minor league) = .97

• Whichever career he chooses, his utility function is: U(income) = (income)^1/2

1. Find the two separate expected values of both the math career and the baseball career. Which is greater?
2. Find the two separate expected utilities of both the math career and the baseball career. Which is greater?
3. Find the certainty equivalent of the baseball career. You may solve the certainty equivalent either by math, by the graph, or both.

Answer rating: 100% (QA)

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