Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk lover (U(W)= W²), which job will she choose? A)her preferences violate the axioms of expected- utility theory. B)job B C)she is indifferent between the two jobs D)job A

Question

Quizplus · Accepted Answer

To determine which job Melanie should choose, we need to calculate the expected utility of each option.

For job A: 
Expected income = (0.1 x 60000) + (0.9 x 50000) = 54000 
Expected utility = U(54000)

For job B: 
Expected income = (0.5 x 46000) + (0.5 x 56000) = 51000 
Expected utility = U(46000)P(0.5) + U(56000)P(0.5)

As Melanie is risk lover and she prefers higher expected income so we have to compare expected income of each job. As expected income of job A (54000) is higher than expected income of job B (51000), she should choose job A. 
Therefore, the correct answer is D.

Melanie Must Choose Between Two Jobs