Wendy works as a teller at a bank for a fixed salary of 1,800 per ...

[itsmyluck]

Wendy works as a teller at a bank for a fixed salary of 1,800 per month. She is offered a job as a salesperson at which there is a 40 percent chance that she will make 5,000 a month and a 60 percent chance that she will make only 1,000 a month.
 
  The figure shows Wendy's utility of wealth curve: a) What is Wendy's expected income from the offered job? b) What is Wendy's expected utility from the offered job? c) Will Wendy accept the offer? Why or why not? d) What is the minimum fixed salary for which Wendy will continue to work for the bank and not take the sales job?

Question 2

In the long run, firms in monopolistic competition become price takers.
 
  Indicate whether the statement is true or false

[Fayaz00962]

Answer to Question 1

a) The probability that Wendy will make 5,000 a month is 0.4, and the probability that she'll make 1,000 a month is also 0.6. Therefore Wendy's expected income is 5,000  0.4 + 1,000  0.6 = 2,600 per month.
b) Wendy's utility of wealth curve shows that if she makes 5,000 a month, her utility is 100, and if she makes 1,000 a month, her utility is 40. Therefore Wendy's expected utility is 100  0.4 + 40  0.6 = 64.
c) Wendy chooses the job that maximizes her expected utility. Wendy's utility of wealth curve shows that if she stays at the current job and makes 1,800 a month with certainty, her utility is 60. If Wendy takes the sales job, her expected utility (calculated in part (b)) is 64. So Wendy will take the sales job.
d) Wendy will continue to work for the bank and not take the sales job if her fixed salary gives her a greater utility than that expected from the offered job, 64. As Wendy's utility of wealth curve shows, her utility is 64 if her risk free income is 2,000 a month. So Wendy will stay at the current job if her fixed salary is greater than 2,000 a month.

Answer to Question 2

FALSE