Question

Question No. 02

 

A graduating MBA student has job offers from two brokerage firms. Firm #1 pays a straight salary of $70,000 (but no commission bonuses). Firm #2 pays a salary of $6,000 plus a commission bonus, with a fixed bonus schedule based on annual sales; the potential commission bonus for firm #2's job is as follows: $150,000 with a probability of 11%, $50,000 with a probability of 83%, $20,000 with a probability of 5%, and zero with a probability of 1%.

 

(a)       What is the expected monetary value of Firm #2's job?

(b)       The student claims to be indifferent between the two job offers. If this is true, is the student risk averse, risk loving, or risk neutral, and why?

 

Answer 1

The expected monetary value;

$0.11×150000=16500$

$0.83×50000= 41500$

$0.05×20000 =1000$

$0.01× 0 = 0$

The expected monetary value is the summation of all the commission bonuses plus the salary

The summation;

$16500+41500+1000+0+6000 =65000$

The Firm #1 job pays 70,000 as opposed to firm#2 job.

From the analysis, it is not true that the student is indifferent because there is a clearly better offer in firm #1 than there is in firm #2.