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Suppose that John is currently earning an income of $10,000 (I = 10) and can earn that income next year with certainty. He is offered a chance to take a new job that offers a .5 probability of earning $16,000, and a .5 probability of earning $5,000.
1) Should he take the new job if is a risk neutral agent?
2) Suppose that in fact his utility function is u(y) = y0.5. Should he take the new job? Is John risk loving, risk neutral, or risk averse?
3) Would John be willing to buy insurance to protect against the variable income associated with the new job? If so, how much would he be willing to pay for that insurance? (Hint: What is the risk premium?)
4) According to Prospect Theory explain how John will make a decision?
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Fixed cost of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information. what is the total cost of production when the firm hires 7 workers.
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Suppose that the average household in a state consumes 800 gallons of gasoline per year. A 20-cent gasoline tax is introduced, coupled with a $160 annual tax rebate per household.
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Does an increase in the average annual labour income imply that the individual worker's labour income has increased and
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