You have a choice between taking two jobs. The first job pays $50,000 annually. The second...

You have a choice between taking two jobs. The first job pays $50,000 annually. The second job has a base pay of $40,000 with a $30% chance that you will receive an annual bonus of $25,000. You decide to take the $40,000 job. On the bases of this decision, can we tell if you are risk averse or risk taker. Explain your response.

Expert Solution

On the basis of your decision, it is very clear that you are a risk taker.

A risk averse person is one who prefers lower returns with known risks rather than higher returns with unknown risks. On the other hand, risk taker is a person who seize the moment and jump on a potential opportunity, usually too risky.

Here, the first option is risk free because there is nothing at stake and you will definitely get $50,000 annually. However, in the second option, there is 30% chance that you’ll get a bonus of $25000 making your annual total $65,000 which is higher than that in option one but here there is even higher percentage (70%) chance that you will not get the bonus and end up with only $40,000, which is lesser than in option one.
This is a high risk option but also gives a chance to earn more. You chose this rather than being on safe side, so this means that you are a risk taker.

Kindly upvote:)

Rahul Sunny answered 2 years ago

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