Natasha is considered risk-averse because her utility function u(I) = √(10I) is concave, and its second derivative is negative, indicating diminishing marginal utility of income. The mathematical condition r(I) = -u''(I)/u'(I) > 0 further confirms her risk aversion, meaning she prefers certain outcomes over uncertain ones with equivalent expected value due to her declining additional satisfaction from incremental income amounts. Thus, a concave utility function reflects Natasha's preference for stability and certainty in income .

Natasha's decision to take the new job hinges on her expected utility from uncertain income being higher than from her current secure income. The new job offers a 0.6 probability of earning $62,500 and a 0.4 probability of earning $36,100, resulting in an expected utility of 22.6 compared to 20 from her current job with $40,000 income. The utility calculation considers her risk-averse nature, as revealed by the utility function u(I) = √(10I). The higher expected utility from the new job reflects a potentially higher satisfaction level due to the probabilistic advantages outweighing the certainty of her current earnings .

Compensating variation measures the change in income required to restore a consumer's utility to its original level after a price change. After the rise of Px from $20 to $50, the compensating variation is calculated to equate utility before and after the price change. With utility U(x, y, z) = x²y²z², compensating variation is evaluated by adjusting income so that the new price-consumption situation allows for the same utility level as before. Here, with M = 450, X = 160.74 is needed to maintain the consumer's original utility level, signifying the amount necessary to compensate the consumer for the loss in welfare due to the price increase .

The expected value of a lottery represents the average payoff one would expect if the lottery were repeated numerous times. It provides a measure of the central tendency of possible outcomes, helping individuals gauge the fairness of the lottery compared to the potential cost of participation. The variance, denoted here as 975, indicates the degree of risk or variability in the possible outcomes, serving as a metric for risk assessment. Together, these metrics allow decision-makers, especially if risk-neutral, to determine the financial attractiveness of participating in the lottery by weighing expected returns against volatility .

Consumer surplus at equilibrium is determined by the area above the price level at equilibrium and below the demand curve. It quantifies the benefit consumers receive from purchasing a product at a market price lower than the maximum price they are willing to pay. For the specific demand curve P = 1200 - 3QD and equilibrium price P* = 840, the consumer surplus is calculated as 0.5×120×(1200−840) = 21600. This reflects the aggregate difference between consumers' willingness to pay and the actual market price over the equilibrium quantity bought .

When a per unit tax of $2 is introduced on sellers, the equilibrium price and quantity are slightly adjusted due to the tax burden shared between buyers and sellers. Specifically, the new equilibrium price becomes $840.6 and the quantity is 119.8 units. On the other hand, if the tax is levied on buyers, the equilibrium quantity remains the same at 119.8. Thus, the division of tax burden between buyers and sellers in competitive markets results in a similar outcome for equilibrium quantity regardless of which side of the market the tax is imposed. This demonstrates the concept of tax incidence, where the burden of a tax is divided between buyers and sellers depending on the price elasticity of demand and supply .

The willingness to pay for insurance in uncertain income scenarios is assessed by aligning the utility of assured income with the expected utility under uncertainty. For Natasha, with her utility function reflecting risk aversion, she determines her maximum insurance payment such that her post-insurance utility equals the expected utility of her uncertain job options (22.6). Thus, X, the amount she is inclined to disburse for certainty, solves the equation where the utility of income net of insurance equals the expected utility of the probabilistic job outcome, computed as X = $864. This effectively highlights the premium she places on receiving a certain income .

Determining the equilibrium price and quantity involves equating the demand and supply formulas to find their intersection point. Given the demand curve P = 1200 − 3QD and supply curve P = 7QS, solving these equations simultaneously determines the equilibrium. Setting the two equal allows for computing the quantity at Q*=120 and price at P*=840. This interaction mathematically represents the condition where the quantity demanded equals the quantity supplied, ensuring market clearing where no excess demand or supply exists .

The introduction of a value-added tax on buyers modifies the demand curve by effectively increasing the price paid by consumers, leading to a consumption decline. In the specific case provided, the original demand curve is adjusted to P = (8000/7) - (20/7)QD with a 5% value-added tax. This effectively makes consumers less willing to purchase the same quantity of the good at each price level, reducing the overall equilibrium quantity. Since the supply curve remains unaffected, the new equilibrium is determined by the intersection of the altered demand curve and the unchanged supply curve .

A risk-neutral individual would pay up to the expected value of the lottery, since they are indifferent between certain and uncertain outcomes with the same expected payoff. For a lottery with outcomes $125, $100, and $50 with probabilities 0.2, 0.3, and 0.5 respectively, the expected value is calculated as 0.2 × $125 + 0.3 × $100 + 0.5 × $50 = $80. Hence, the maximum amount a risk-neutral person would pay is $80, reflecting their calculation of the average expected payoff of engaging in the lottery .