Amanda recently graduated from university,and she has a job offer with uncertain income.There is a 70% probability that she will make $10 000 and a 30% probability that she will make $70 000.Suppose Amanda is offered another job with a certain income.All else equal,if she has a constant marginal utility of income,she will accept the second job offer only if it pays more than:
A) $40 000.
B) $28 000.
C) $10 000.
D) $21 000.

Question

Quizplus · Accepted Answer

We need to find the minimum amount that Amanda would accept in the certain job offer. Let's calculate her expected utility of the uncertain job offer:

Expected Utility (EU) = 0.7*ln(10000) + 0.3*ln(70000)
EU = 0.7*9.21 + 0.3*11.16
EU = 9.45

Let's assume that the certain job offer pays x. If Amanda has a constant marginal utility of income, then her utility from the certain job offer would be:

Utility (U) = ln(x)

She would accept the certain job offer if her utility from it is greater than her expected utility from the uncertain job offer. That is:

ln(x) > 9.45
x > e^9.45
x > $27 144.08

Therefore, Amanda would accept the certain job offer only if it pays more than $28 000.

Amanda Recently Graduated from University,and She Has a Job Offer