You need to hire some new employees to staff your start-up venture. You know tha
ID: 1197698 • Letter: Y
Question
You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them:Employee Value Probability
$50,000 0.25
$60,000 0.25
$70,000 0.25
$80,000 0.25
What is the expected value of five employees you hire?
NOTE: Need to consider adverse selection. You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them:
Employee Value Probability
$50,000 0.25
$60,000 0.25
$70,000 0.25
$80,000 0.25
What is the expected value of five employees you hire?
NOTE: Need to consider adverse selection.
Explanation / Answer
expected value is calculated by the formula E(X) = x1p1 + x2p2 + x3p3 + . . . + xnpn, where x1 x2 x3 are the random variable X values, and p1 , p2 ...pn is their respective probablities.
now expected value of the employees hired is = (50.000 X 0.25) +( 60,000 X 0.25) + (70,000 X 0.25) + (80,000 X 0.25)= $65,000
the expected value of employees is $65000 without adverse selection.BUt with adverse selection this value is not seen by the firm. This is because only the $50,000 and $60,000 employees will accept it because 65000$ is greater than these. therefore now expected value= (50,000 X 0.25) + ( 60,000 X 0.25)= 55,000$, now only 50,000$ employees will accept it. therefore expected value of enployees with adverse selection is 50,000
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