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The following table displays uncertainties in John's monthly income:
State Probability (0) Income (Y) Utility (U)
Sick 0.4 2,500 U(2,500)
Healthy 0.6 4,900 U(4,900)
a. What is John's expected income (expected value of income)?
b. Let John's utility function be U = Y0.5, where Y is John's monthly income. Calculate John's expected utility of income (expected value of utility of income).
c. Compare the utility of John's expected income and the expected utility of his income. Is John risk averse or not (refer to John's utility function given above)? Explain your answer using a graph, with income on the horizontal axis and utility on the vertical axis.
d. Calculate the maximum amount that John is willing to pay to avoid the risk of income loss resulting from becoming sick.
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