-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. What amount must James' professor pay in order to make James indifferent between being a research assistant and working at Games Galore?
A) $300 per month
B) $350 per month
C) $475 per month
D) $600 per month

Question

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. What amount must James' professor pay in order to make James indifferent between being a research assistant and working at Games Galore?
A) $300 per month 
B) $350 per month 
C) $475 per month 
D) $600 per month

Quizplus · Accepted Answer

James' expected utility from working at Games Galore is:(0.25 * 100) + (0.75 * 600) = 475So, James' professor must pay him $475 per month in order to make him indifferent between being a research assistant and working at Games Galore.

-James Has a Utility of Wealth Schedule in the Above