Reference no: EM131424207

1. A worker has a utility function over income U(I) = √I. She is picking between two jobs for the following year. Job X pays $40,000; she can get this job for sure. She is also considering Job Y; there are other candidates for this job, and the probability of not getting it during the hiring process is0.2 (she would get no income at all if that happened, and the process concludes after Job X's deadline).If she gets the job, she would make $Z. Aside from the probabilities of being hired and the salaries, the jobs are exactly the same. Which will be her decision for the year if Z is

(a) 36,100?

(b) 40,000?

(c) 60,025?

(d) 62,500?

(e) 67,600?

Show your work in each case (if you did not need to do any calculations to know the answer, state so).

Additionally, calculate the expected value of her income for Job X and Job Y in situation c) above.How do you reconcile these figures with her actual decision?

2. Show the effect of an increase in the student loans interest rate in a figure on the Schooling/Rate plane. Briefly explain the result.

3. Explain why a newly hired worker at a firm that operates in a competitive environment could be satisfied with getting paid much less than her productivity during her first month while she gets general training. Explain why she might be less satisfied with this situation if the training is specific to the firm.