Asked by Muhideen Ibrahim on Jun 27, 2024
Verified
Refer to Figure 17.2. Fiona has two job offers when she graduates from college. Fiona views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $60,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $80,000. Fiona believes that she has a 50-50 chance of earning the bonus. If Fiona takes the offer that maximizes her expected utility and she is risk-neutral, then
A) she will take the first offer.
B) she will take the second offer.
C) she is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information-we cannot say what she will do.
Expected Utility
A strategy in economics and game theory where individuals choose the option with the highest expected benefit, taking into account all future outcomes.
Risk-neutral
Refers to a mindset or condition where an individual or entity is indifferent to risk when making investment decisions, focusing instead on the potential returns without giving additional weight to the possibility of loss.
- Absorb the essence of expected utility and how it guides decision-making in scenarios with uncertain outcomes.
- Examine employment offers through the lens of predicted utility and personal risk tolerance levels.
- Distinguish among risk-loving, risk-neutral, and risk-averse personalities through their utility gained from income.
Verified Answer
PM
Peter MiloneJul 01, 2024
Final Answer :
C
Explanation :
Since Fiona is risk-neutral, she will consider the expected value of each offer. The expected value of the second offer is $20,000 + 0.5 * $80,000 = $60,000, which is the same as the fixed salary of the first offer. Therefore, she is indifferent between the two offers as both yield the same expected utility.
Learning Objectives
- Absorb the essence of expected utility and how it guides decision-making in scenarios with uncertain outcomes.
- Examine employment offers through the lens of predicted utility and personal risk tolerance levels.
- Distinguish among risk-loving, risk-neutral, and risk-averse personalities through their utility gained from income.