Question

You have two job offers. Alpha Firm offers a salary of $40,000 per year with no bonuses, while Beta Firmoffers a base salary of $35,000 per year with a 25% chance that you will receive an annual bonus of $10,000. The expected salary of working for Alpha Firm is ____________ while the expected salary of working for Beta Firm is ________If you were risk neutral, the expected value of the yearr bonus offered by Beta Firm would need to be at least_______ to be indifferent to the choice between the two options.

Answer 1

Answer:

$40,000 per year; $37,500 per year; $40,000.

Explanation:

From the question above, we are given the following parameters; Alpha Firm offers a salary = $40,000 per year + no bonuses, "Beta Firm offers a base salary of $35,000 per year with a 25% chance that you will receive an annual bonus of $10,000".

So, to answer the question,the expected salary of working for Alpha Firm will surely be = $40,000 per year.

At Beta Firm the expected salary is = $35,000 + 0.25($10,000) = $37,500.

Therefore, if I was risk neutral, the expected value of the year bonus offered by Beta Firm would need to be at least $40,000 for me not to be indifferent to the choice between the two options.