Answer to Question #200582 in Economics for azfarjalal

Question

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

(a) The expected monetary value of Firm #2's job is:

$EV = 6,000 + 150,000×0.11 + 50,000×0.83 + 20,000×0.05$ = $64,010.

(b) if the student claims to be indifferent between the two job offers, then the student is risk loving, because the value of the second offer will be probably lower.