Suppose that Natasha’s utility function is given by u (I) = √ (10I) where I represents annual income in thousands of dollars.
a) Is Natasha risk loving, risk neutral, or risk averse? Explain.
b) Suppose that Natasha is currently earning an income of $40,000 (I = 40) and can earn that income next year with certainty. She is offered a chance to take a new job that offers a 0.6 probability of earning $44,000 and a 0.4 probability of earning $33,000. Should she take the new job?
c) In (b), would Natasha be willing to buy insurance to protect against the variable income associated with the new job? If so, how much would she be willing to pay for that insurance?