Assume that there are two types of workers: safe and risky.At the beginning of the first period a firm must decide to hire a safe or risky worker.Safe workers have constant ability worth $200 per period.There is a 50 percent chance a risky worker will have ability worth $300 per period and a 50 percent chance a risky worker will have ability worth $100 per period.What is the risky worker's average productivity?
A) $100
B) $200
C) $300
D) $400
E) $500

Question

Quizplus · Accepted Answer

The risky worker's average productivity is the expected value of their productivity, which is calculated as the probability-weighted average of their possible abilities. Therefore, the risky worker's average productivity is:
(0.5 x $300) + (0.5 x $100) = $150 + $50 = $200

The best choice for the firm depends on their risk preferences. If the firm is risk-averse, they should choose the safe worker, as their ability is constant and known to be $200 per period. If the firm is risk-neutral or risk-loving, they should choose the risky worker, as their expected productivity is higher at $200 per period.

Assume That There Are Two Types of Workers: Safe and Risky.At