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You are making an app with a 5% chance of making a ton-load of money, and 95% chance of earning...

Question:

You are making an app with a 5% chance of making a ton-load of money, and 95% chance of earning nothing. Your utility is the square root of income (Utility = Y1/2); you will have $10,000,0001/2 happiness if your app succeeds but 01/2 happiness if it fails. a)) What is the expected value of your app? How much money can you expect to make? What is your utility at that income ?

Marginal propensity to save:

The marginal propensity to save is the ratio of change in saving to change in disposable income. There exist a positive relationship between saving and income such that the saving curve is upward sloping.

Answer and Explanation:


a) The expected value of app

Expected value= 5%*10000000+95%*0

Expected value=0.05*10000000+0.95*0

Expected value= $500000+0

Expected value = $500000

b) The money which we can expect to make is $500000.

c) Utility

Utility=squareroot($500000)

Utility=$707.106781


Learn more about this topic:

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What is Money? - Definition and Types

from Economics 102: Macroeconomics

Chapter 11 / Lesson 4
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