Problem 1
John has no money for Christmas presents.
If he gets an A from micro, he gets W = 400 EUR from his parents.
Otherwise, he gets only W = 100 EUR.
The more John studies, the higher is the probability of getting an A.
S is his study effort and the probability that he gets an A.
John’s utility function is U(S, W ) =
√
W − 10S2.
a) What S maximizes John’s von Neumann-Morgenstern utility function?
b) How does John’s S change if he currently has EUR 300 instead of 0?
1 / 1