1) refer to the information provided in the figure above to answer the question
ID: 1177860 • Letter: 1
Question
1) refer to the information provided in the figure above to answer the question that follows. 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 john's expected utility for each job offer?
a) expected utility of 200 for the first offer & EU of 164 for the second offer
b) expected utility of 200 for the first offer & EU of 110 for the second offer
c) expected utility of 100 for the first offer & EU of 164 for the second offer
d) expected utility of 200 for the first offer & EU of 218 for the second offer
2) using the same figure above, suppose john's utility from income is given in the figure. from this, we would say that john is
a) risk loving
b) a risk taker
c) risk averse
d) risk neutral
Explanation / Answer
Answer to questions number one is as follow:
John option number one: get bonus plus $20K, so that is $80K or 218 Utility
John Option number two: get no bonus and only $20K, so that is $20K total or 110 Utility
Based on that we calculate Expected Utility = Probability of option 1 X Utility of option 1 + probability option 2 X by utility option 2 = so with that formula = 0.5 (since it's 50%chance) * 218 + 0.5*110 = 109 + 55= 164.
That is 164 for his 2nd job offer, while his 1st job offer gives him the job and income with certainty, so it will be 200 Utility.
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