Company A promised life employment. Life without employment means one month lay

Question

Company A promised life employment. Life without employment means one month lay off period per year. There is a 20% chance of being laid off once in a given year. Company A pays its employees $60,000.00 per year when the firm does not guarantee life employment. Considering the above, choose an answer and explain your reasoning:

a. If employees are risk averse, they will prefer to get life employment for sure if their pay is $60,000.00;

b. If employees are risk averse, they prefer life employment if their pay is $59,000.00 per year;

c. If employees are risk neutral, they will definitely opt for no life employment and $60,000 in pay rather than a large pay cut for life employment;

d. If employees are risk neutral, they don't mind being laid off

e. both b and c are true.

Explanation / Answer

b. If employees are risk averse, they prefer life employment if their pay is $59,000.00 per year.

they would be ready to sacrifice $1000 in turn of life employment as this would minus the risk of being unemployed and they would have job security.

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