Rajendra is in the final year of high school and is considering going to univers
ID: 1195513 • Letter: R
Question
Rajendra is in the final year of high school and is considering going to university majoring in nursing or engineering. He applies for both programs and has a 60 percent chance of getting into the engineering school. The university has assured him that if he is not accepted into engineering it will guarantee him a place in nursing. the ongoing salary of an engineer is $625 per year and for nurse $400.
(a) Suppose that inflation is negligible. What is Rajendra’s expected future annual income?
(b) Suppose that Rajendra’s utility function on income M is U = M. What is Rajendra’s expected utility?
(c) There is a math tutor who can improve Rajendra’s math skills and he will be admitted in engineering for sure. How much is Rajendra willing to pay for the tutoring?
Explanation / Answer
Expected income = 625 x 0.6 + 400 x 0.4 = $535
Expected utility = SQRT 535 = 23.13
Rajendra's willingness to pay = 625 - 535 = $90
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