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 averse (U(W)= W^1/2), which job will she choose? A)job B B)her preferences violate the axioms of expected- utility theory. C)job A D)she is indifferent between the two jobs

Question

Quizplus · Accepted Answer

To determine which job Melanie will choose, we need to calculate her expected utility (EU) for each job and compare them. Using the given formula for Melanie's utility function, we get:

EU(A) = (60,000)^0.5(0.1) + (50,000)^0.5(0.9) = 7,746.04
EU(B) = (46,000)^0.5(0.5) + (56,000)^0.5(0.5) = 6,324.56

Therefore, Melanie's EU is higher for job A. Since she is risk averse, she will choose the job with the higher expected utility, which is job A in this case.

Melanie Must Choose Between Two Jobs