Problem:
You have received two job offers. Firm A offers to pay you $85000 per year fro two years. Firm B offers to pay you $90000 for two years. Both jobs are equivalent. Suppose that Firm A contract is certain, but B has a 50% chance of being bankrupt at the end of the year. In that event, it will cancel your contract and pay you lowest amount possible for you to not quit. If you did quit, you expect that you could find a new job paying $85000 per, but you would be unemployed for 3 months while you search for it.
1) Say you took the job at Firm B, what is the least Firm B can pay you next year in order to match what you would earn if you quit?
2) Given your answer to part B, and assuming your cost of capital is 5%, which offers pays you a higher present value of your expected wage?
3) Based on this example, discuss one reason why firms with a higher risk of bankruptcy may need to offer higher wages to attract employees.