There are two employers in Bucolic that hire people who do not have a high school degree: a grocery store and a hardware store. The grocery store pays $10 per hour and the hardware store pays $12 per hour. People who work at either store can work as many hours as they want at those wages. Assume that it takes two hours to interview for a job. Lee works at the grocery store, but would like to work at the hardware store. If Lee interviews at the hardware store, there is a 10% probability of being hired. Assume that Lee is risk-neutral. What is Lee's expected hourly benefit from interviewing at the hardware store?

Question

Quizplus · Accepted Answer

Lee's current benefit is $10 per hour. If Lee interviews at the hardware store, there is a 10% probability of being hired and earning $12 per hour. Therefore, the expected hourly benefit is:

Expected hourly benefit = (Probability of being hired x Hourly wage at hardware store) + (Probability of not being hired x Hourly wage at grocery store)
Expected hourly benefit = (0.10 x $12 per hour) + (0.90 x $10 per hour)
Expected hourly benefit = $1.20 + $9
Expected hourly benefit = $10.20

Therefore, Lee's expected hourly benefit from interviewing at the hardware store is $10.20 - $10 (the cost of the interview) = $0.20. Hence, the best choice is option C.

There Are Two Employers in Bucolic That Hire People Who