Chloe recently graduated from the University of Chicago with a doctorate in economics. She has been offered a job in finance on Wall Street in New York with an uncertain income. There is an 80% probability that she will earn $100,000 and a 20% probability that she will earn $200,000. Suppose Chloe is offered another job at the Federal Reserve Bank of New York with a certain income. All else equal, if she has a constant marginal utility of income, she will accept the second job offer if it pays more than:

Question

Quizplus · Accepted Answer

Chloe has a constant marginal utility of income, meaning that she values each additional dollar of income equally regardless of her overall income level. Therefore, her decision between the two job offers depends solely on the expected income from each job. The first job has an expected income of:

(0.8 x $100,000) + (0.2 x $200,000) = $120,000

The second job has a certain income that must be at least $120,000 to be preferred to the first job. Therefore, Chloe will accept the second job if it pays more than $120,000. The only option that meets this requirement is choice B, $140,000.

Chloe Recently Graduated from the University of Chicago with a Doctorate