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.

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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 1 year ago

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