Question

After graduating, Sallie Handshake’s best job offer will either be with a Big-8 accounting firm for $160,000 a year or as a State Farm agent in Grand Rapids, Michigan, for $40,000 a year. She can increase the probability of the former outcome by studying more, but such studying has its costs. If S represents her amount of studying (where S = 0 is no study and S = 1 is all-out effort), her probability of getting the job with a Big-8 firm just equals S. Her utility depends on how hard she studies and her subsequent annual income Y. She tries to maximize the expected value of the von Neuman-Morgenstern utility function U(S, Y) = Y1/2 − 400S2. If she chooses S to maximize her expected utility, how much will she study?

Answer 1

The answer is "S=0.25"

Explanation:

Given:

firm value= $160,000

time= $40,000 per year

s=0 to 1

function U(S, Y) = Y1/2 − 400S2

by solve the given value it will gives the study time that is:

S=0.25 that's why it is correct.