Tiffany, who has no wealth, has a von Neumann Morgenstern utility function that is equal to u(c)=c^1/2, where c is her terminal wealth. She has to choose between two job offers, each of which has a wage that is uncertain. The first job with equal probability will pay her either $1 or $3. The second job offers a wage of $0 with probability 1/9, $2 with probability 7/9, and a wage of $4 with probability 1/9.

1. Find the expected value and standard deviation of the two wage offers.
2. Which of the two offers will Tiffany choose? Why do you think she rejects the job offer with the lower variance even though she is risk averse?

Answer rating: 100% (QA)

1 Expected value and standard deviation of first job Expected value 1 32 2 Standard devi... View the full answer