Shay is risk averse and has a reservation wage of $50.She is offered two different labor contracts.One is a fixed wage of $100 per day,and the other is a piece-rate contract.In the latter,the pay rate is $1 per piece.In a good day she sells 160 units,and in bad day she sells 40 units.The likelihood of a good or a bad day is 50%.
A) Shay accepts the fixed wage contract.
B) Shay declines both contracts.
C) Shay accepts the piece-rate contract.
D) Shay is indifferent between both contracts.

Question

Quizplus · Accepted Answer

Given Shay is risk averse and her reservation wage is $50, she would prefer the certainty of a fixed wage of $100 per day over the variability of the piece-rate contract, where her earnings could fluctuate significantly.

Shay Is Risk Averse and Has a Reservation Wage of $50.She