Ken Jennings has just been offered a job with a start-up company. The job pays $30,000 guaranteed per year. On top of that that there is a ½ probability that he can get a $50000 performance bonus making a total of $80,000. Ken operates under the assumptions of expected utility theory and in general, has a strong preference for a job that pays a fixed amount per year. Ken's utility of wealth function is given by U(W) = W^0.5. (U(W) is equal to the Square Root of W). Show that if Ken has choice between this job and another job then he will choose the job with the start-up company as long as the other job pays less than approx. $52,000 per year.

Question

Quizplus · Accepted Answer

The Answer of Ken Jennings has just been offered a job with a start-up company. The job pays $30,000 guaranteed per year. On top of that that there is a ½ probability that he can get a $50000 performance bonus making a total of $80,000. Ken operates under the assumptions of expected utility theory and in general, has a strong preference for a job that pays a fixed amount per year. Ken's utility of wealth function is given by U(W) = W^0.5. (U(W) is equal to the Square Root of W). Show that if Ken has choice between this job and another job then he will choose the job with the start-up company as long as the other job pays less than approx. $52,000 per year.

Ken Jennings Has Just Been Offered a Job with a Start-Up