Assume, Elizabeth's Utility Function Is: U(W) = W^0

Essay

Assume, Elizabeth's utility function is: U(W) = W^0.5 and she operates under the tenets of expected utility theory. She is considering two job proposals:. Alternative 1: take a job at a bank with a certain salary of $54,000 per annum. Alternative 2: take a job with a start-up company, get a base salary of $4,000 per annum a plus a bonus of $100,000 per annum a with probability 0.5 (otherwise bonus = $0). Show that Elizabeth would prefer Alternative 1 over Alternative 2 based on expected utility calculations.