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You work for the State Departm

You work for the State Department of Labor and have been given the task of evaluating a state job-training program. In order to conduct the analysis, suppose that the typical client for the program has the following utility function of income I:

Where α > 0, 0 < β < 1.

a. Sketch the typical client’s utility function and explain the person’s attitude toward risk.

b. Suppose that you must evaluate a proposed government job-training program that would have an unpredictable effect on the typical client’s income, which is u = (I + α)β currently $20,000 per year. The program will leave the person’s annual income unchanged with probability 0.3, or it will increase his income by $10,000 with probability 0.7. Calculate the benefit of the program to the typical client, assuming that α = $5,000 and β = 0.5.

Solution:

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