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​ john's expected utility for each job​ offer?

Answer 1

First offer expected utility = $50,000 Second offer expected utility = $50,000 This requires you to know the meaning of "expected utility" which is quite simply the sum of every possible outcome multiplied by the probability of the outcome. So let's take a look at the job offers and see what their expected utility is. First offer. 100% chance of $50,000 = $50,000 So the first offer has an expected utility of $50,000 Second offer 50% chance of $20,000 = $10,000 ; John didn't get the bonus. 50% chance of $20,000 + $60,000 = 50% of $80,0000 = $40,000 ; John got the bonus. Expected utility = $10,000 + $40,000 = $50,000 So the second offer also has an expected utility of $50,000.