Job X pays a yearly salary of $52,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would most people prefer?

Question

Quizplus · Accepted Answer

Job X is more certain and offers a fixed salary of $52,000, whereas Job Y's salary is dependent on the state of the economy. The expected value of Job Y can be calculated as $10,000 x 0.3 (probability of a bad economy) + $70,000 x 0.7 (probability of a good economy) = $49,000. Although the expected value of Job Y is higher than Job X's fixed salary, the uncertainty of the economy makes Job Y riskier. Therefore, most people would prefer Job X because it is more certain.

Job X Pays a Yearly Salary of $52,000, Regardless of the State