Shanshan is considering what major to study in college. Her utility function is based on the
income she earns, and is defined by U(I) = I0.7 . If she majors in metalworking, she will earn
$145,000 per year with probability 1. If she majors in finance, she will earn $300,000 per year
with probability 0.6 (assuming the market goes well) and $30,000 with probability 0.4 (if the
market tanks and she has to go move in with her parents and work as a tutor).
a. (2 pts) Is she risk averse, risk neutral, or risk loving? Explain.
b. (2 pts) Write out the equation for her expected utility for each major
c. (3 pts) Which major will she pick? Show your work.
probability (that is, the only other thing that can happen), he will attend for three years but not
get his degree. The cost of attending college is $400,000. The interest rate is 3%.
• If he attends college, Henry will work for 50 years and then retire. If he earns a college
degree, he will earn no income for four years, and then make a $120,000 base annual
salary, which increases with inflation at 3% per year.
• If he attends college but does not earn a degree, he not work for three years, and then
work for 51 years, and then retire. He will make $50,000 per year, which increases, but
only at 1% per year.
• If he does not attend college, he will begin work immediately, work for 54 years, earning
$80,000 per year, which increases with inflation at 2% per year, and then retire.
performance on the midterm exam. Draw a set of indifference curves showing the
combinations in which these two combine to produce performance-utility. Explain in
words how the curvature of the indifference curves represents how this performance-
utility production works.