Sarah Has the Utility Function U(x)= 1 - 1/x,where X

question 54

Essay

Sarah has the utility function U(x)= 1 - 1/x,where x is the present value of her lifetime income.Sarah is trying to select a career.If she goes into teaching,she will make x=5 with certainty.If she pursues acting,she will make x=400 if successful or x=2 if unsuccessful (and therefore ends up waiting tables).The chance of succeeding in acting is 1% if she pursues acting.
a.Determine which career Sarah will choose.Is she choosing the career with the higher expected value? Explain.
b.An acting career expert charges 0.01 to determine if a person will succeed at acting.By going to an expert,Sarah can choose the best career according to her skills.Assuming that the expert is able to correctly determine if Sarah will be a successful actor,will she pay for this service?

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