You have chosen biology as your college major because you would like to be a med

Question

You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted into medical school is about 10 percent. If you are accepted into medical school, then your starting salary when you graduate will be $300,000 per year. However, if you are not accepted, then you would choose to work in a zoo, where you will earn $40,000 per year. Without considering the additional educational years or the time value of money, what is your expected starting salary as well as the standard deviation of that starting salary?

Explanation / Answer

expected salary = probability of medical school acceptance * salary of medical doctor + (1 -probability of medical school acceptance) * salary in zoo

= 0.1 * 300000 + .9 * 40000 = $66000

Standard deviation = [ probability of medical school acceptance* (salary of medical doctor - expected salary)^2

+ (1 -probability of medical school acceptance) *( salary in zoo - expected salary)^2]^(1/2)

=

[ 0.1* (300000 - 66000)^2

+ (1 -0.1) *( 40000 - 66000)^2]^(1/2)

= 78000

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