2

2. Micheal is a bus driver. He has a utility function U(I) = VI, where I is total labor income. Assume that with probability 7, Micheal would get into an accident while working. So after he got paid $900, he needs to pay $500 for the lost. With probability 1 – 1, no accident happens, and he gets $900. (a) What is the expected utility of Micheal working as a bus driver? (b) If instead of this job. Micheal was offered an office job as a salesman at Dunder Mifflin paper company in Scranton, where he can work with a certain income $300. If the probability of accident happening is 0.5, that is (T = 0.5). Do you think Micheal would accept a job as a Salesman or not? (c) What is the highest 7, such that Micheal will stay as a bus driver? (d) If the probability is a 0.2, how much should Dunder Mifflin offer in order to get Micheal to accept the offer? (e) What if instead of U(I) VI, now Micheal has a new utility function U(I) = 1). What would be your the new answer for part (d)? (i.e. given the probability of accident happening is a = 0.2, how much should Dunder Mifflin offer in order to get Micheal to accept the offer?) (f) Please explain why there is a difference in Dunder Mifflin's offer between (d), and (e)? (Hint: Risk attitude.)