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Suppose that Natasha's utility function is given by u(l) = y^5, 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 $10,000 (I = 10) and can earn that income next year with certainty. She is offered a chance to take a new job that offers a .5 probability of earning $16,000, and a 5 probability of earning $5000. 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? (Hint: What is the risk premium?)

Microeconomics, Economics

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