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 offers a guaranteed salary of $52,000, while Job Y offers a possible salary of $10,000 or $70,000 depending on the state of the economy.

To find the expected value of Job Y, we can multiply the probability of a bad economy (0.30) by the salary in a bad economy ($10,000) and add it to the probability of a good economy (0.70) multiplied by the salary in a good economy ($70,000).

Expected value of Job Y = (0.30 x $10,000) + (0.70 x $70,000) 
= $3,000 + $49,000 
= $52,000

This means the expected value of Job Y is the same as the guaranteed salary of Job X. However, Job X has no possibility of earning less or more than $52,000, making it the safer choice. Therefore, most people would prefer Job X which is more certain than Job Y.

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