Once again consider a worker who has a utility function U = √ Y. In a good week he earns $25 and in a bad week he earns nothing. Good and bad weeks each have probabilities of 50%.
(a) What is his average or expected utility in numerical terms?
(b) Suppose the government enters the picture and requires him to contribute to an unemployment insurance scheme. He must pay $9 every time he has a good week. In return the government pays him $9 whenever he has a bad week. Compute his average or expected utility with the new insurance scheme in place.