Chapter 20, Problem 12P

To determine

To determine: The expected value in the given situation and the one who will be hired as an employee.

Concept introduction

Expected Value: It is defined as the weighted average of probable events where the weights of each probable value corresponds to the chances of that value occurring. The formula to calculate expected value is:

Where,

• is expected value.
  
• is probability of event 1.
  
• is probability of event 2.
  
• is probability of event N.
  
• is event 1.
  
• is event 2.
  
• is event N.
  

Expected Utility It is defined as the value of a person’s total utility, so that there is no certainty for future results.

Risk Averse: When a person does not like taking risk, then he is referred to as risk averse. In case of risk averse, the marginal utility is diminishing in nature which means that for every additional unit of good, the marginal utility declines.