Question

John has two job offers when he graduates from college. John views the offers as​ identical, except for the salary terms. The first offer is at a fixed annual salary of​ $50,000. The second offer is at a fixed salary of​ $20,000 plus a possible bonus of​ $60,000. John believes that he has a​ 50-50 chance of earning the bonus. What is the expected value of​ John's income for each job​ offer?

Answer 1

Answer:

1. E(U) = $50,000

2. E(U) = $50,000

Explanation:

Under Option 1:

The expected value E(U) is computed as:

He will get the fixed salary of $50,000. So, its expected value E(U) will be:

E(U) = $50,000

Under Option 2:

The expected value E(U) is computed as:

He will get the fixed salary of $20,000 and in addition bonus of $60,000. S0,

In this there is 2 conditions, which are:

1st Condition:

If he get bonus, then the salary would be likely to

= $20,000 + $60,000

= $80,000

2nd Condition:

If does not get bonus, then the salary would be:

= $20,000 + $0

= $20,000

So, there is chance of 50-50 for earning the bonus, in that case E(U) will be:

E(U) = 50% of $80,000 + 50% 0f $20,000

= (0.5080000) + (0.5020000)

= $40,000 + $10,000

= $50,000