Microeconomics Theory 2

Should John choose to go to college?

John wants to get a particular job 4 years from now.

If he does not go to college and earn a degree, he can get that job with 50% probability.

If he goes to college and he graduates he can get that job with 80% probability.

John’s current wealth is \$ 250,000 and the job will pay him a total present value of \$1,000,000 over his lifetime.

College will cost \$ 90,000 in present value. If John does not go to college, he can get a lower paying job that will pay him a total of \$ 250,000 in present value over his lifetime.

John’s utility is U = W (1/2) where (1/2) means square root and W is John’s net wealth (that is John’s utility is the square root of his net wealth).

Assume that the cost of studying for John is zero (he is very smart).

A) Is John risk averse or not? How do you know?

B) Do and show all the required calculations to decide whether John should go to college or not.

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