Question

Jim has a choice between two jobs. Job A would pay him $15 an hour with certainty, and the job B is commission based where he could earn $12, with a 50% probability and $18 with a 50% probability. Which job would he choose? a. Neither of the jobs b. Job A c. Job B d. He would choose to exit the labor market

Answer 1

Job A offers a fixed $15 per hour, while Job B offers a variable pay of either $12 or $18 per hour, each with a 50% probability. The expected value of Job B is $15, the same as Job A's fixed rate. Thus, there is no financial advantage to either job, and the decision may be based on Jim's risk preference.

Step-by-step explanation:

In deciding between Job A and Job B, Jim is comparing a guaranteed pay versus a variable income based on commissions. For Job A, Jim will earn $15 an hour regardless of any other factors. However, for Job B, the pay is not fixed. He has a 50% chance of earning $12 an hour and another 50% chance of earning $18 an hour.

To calculate which job has the better expected value, we'll use the concept of probability. The expected value for Job B can be calculated as follows: (0.5 * $12) + (0.5 * $18) = $6 + $9 = $15. Since the expected value of Job B is equal to the certain value of Job A ($15 per hour), there is no financial advantage to choosing one job over the other based on pay alone. If Jim values certainty, he might prefer Job A; if he is willing to accept some risk for potentially higher pay, he might prefer Job B.

Answer 2

b. Job A

Step-by-step explanation:

The calculation of choosing the job is given below;

Expected payoff for Job B is

= 0.50 × $12 + 0.50 × $18

= $6 + $9

= $15

And,

The Payoff from job A is $15 with certainty

Now we assume that Jim would be a risk-averse person that selects the thing i.e. sure

So he should choose Job A only

Hence, the correct option is b.