Asked by Walter Enrique on Jul 06, 2024
Verified
Refer to Figure 17.2. Sam has two job offers when he graduates from college. Sam 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 $30,000 plus a possible bonus of $60,000. Sam believes that he has a 50-50 chance of earning the bonus. If Sam takes the offer that maximizes his expected utility and is risk-neutral, which job offer will he choose?
A) Sam will take the first offer.
B) Sam will take the second offer.
C) Sam is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information.
Expected Utility
A theory in economics that calculates the utility expected from different choices, aiming to predict an individual's preferences under uncertainty.
Risk-neutral
Refers to being indifferent to risk, showing no preference toward either risk-taking or risk-avoidance behavior.
- Learn about the concept of expected utility and its utilization in decision-making during uncertain times.
- Appraise job propositions in light of their projected utility and one's own risk predilections.
- Pinpoint the characteristics defining risk-seeking, risk-indifferent, and risk-averse individuals as per their derived utility from income.
Verified Answer
ZD
Zherica DavisJul 11, 2024
Final Answer :
C
Explanation :
Since Sam is risk-neutral, he will base his decision on the expected value of each offer. The first offer has an expected value of $60,000. The second offer has an expected value of $30,000 (fixed salary) plus 0.5 * $60,000 (50% chance of earning the bonus), totaling $60,000. Therefore, both offers have the same expected value, making Sam indifferent between the two.
Learning Objectives
- Learn about the concept of expected utility and its utilization in decision-making during uncertain times.
- Appraise job propositions in light of their projected utility and one's own risk predilections.
- Pinpoint the characteristics defining risk-seeking, risk-indifferent, and risk-averse individuals as per their derived utility from income.