Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility and is risk-neutral, which job offer will he choose?
A) Mark will take the first offer.
B) Mark will take the second offer.
C) Mark is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information.

Question

Quizplus · Accepted Answer

The expected utility for the second offer is calculated as 0.5 * $20,000 (no bonus) + 0.5 * $80,000 (with bonus) = $10,000 + $40,000 = $50,000, which is the same as the fixed salary of the first offer. Since Mark is risk-neutral, he is indifferent between the two offers as they both yield the same expected utility.

Mark Has Two Job Offers When He Graduates from College