Emma recently graduated from university in actuarial mathematics and now has a job offer with an uncertain income. There is a 70% probability that she will earn $100,000 and a 30% probability that she will earn $200,000. Suppose Emma is offered another job with a certain income. All else equal, if she has a constant marginal utility of income, she will accept the second job offer only if it pays more than:

Question

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Emma's expected income from the first job offer is:

(0.7 x $100,000) + (0.3 x $200,000) = $130,000

If she has a constant marginal utility of income, this means that the additional satisfaction she gains from each additional dollar of income is the same, regardless of her current level of income. In other words, she values each additional dollar of income equally.

Therefore, Emma would only accept the second job offer if its certain income is greater than her expected income from the first offer ($130,000). The only answer choice that satisfies this condition is B) $130,000. If the second job offer pays less than $130,000, Emma would be better off taking the first job offer with its uncertain income.

Emma Recently Graduated from University in Actuarial Mathematics and Now