Question

There are two employers in Bucolic that hire people who do not have a high school degree: a grocery store and a hardware store. The grocery store pays $10 per hour and the hardware store pays $12 per hour. People who work at either store can work as many hours as they want at those wages. Assume that it takes two hours to interview for a job. Lee works at the grocery store, but would like to work at the hardware store. If Lee interviews at the hardware store, there is a 10 percent probability of being hired. Assume that Lee is risk-neutral. What is Lee's expected hourly benefit from interviewing at the hardware store?

Answer 1

Answer:

The expected hourly benefit is $0.2.

Explanation:

The grocery store pays $10 per hour and the hardware store pays $12 per hour.

Lee is working at the grocery store so he must be earning $10 per hour.  

The job interview takes two hours. If Lee interviews at the hardware store, there is a 10 percent probability of being hired.

This 10% probability means that there is a 10% chance of getting a raise of $2 for Lee.  

And there is a 90% probability of no gain or wages remaining the same.  

Expected hourly benefit

= $(0.1\ \times\ 2)\ +\ (0.9\ \times\ 0)$

= 0.2 + 0

= $0.2