Hudson has two job offers when he graduates from college. Hudson views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $45,000. The second offer is at a fixed salary of $25,000 plus a possible bonus of $40,000. Hudson believes that he has a 50-50 chance of earning the bonus. If Hudson takes the offer that maximizes his expected utility and he is risk-neutral, then
A) he will take the first offer.
B) he will take the second offer.
C) he is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information-we cannot say what he will do.

Question

Quizplus · Accepted Answer

The expected utility for the second offer is calculated as 0.5 * $25,000 (no bonus) + 0.5 * $65,000 (with bonus) = $45,000, which is the same as the fixed salary of the first offer. Since Hudson is risk-neutral, he would be indifferent between the two offers as they both yield the same expected utility.

Hudson Has Two Job Offers When He Graduates from College