1. Question 1 (30 points)
2. John Dear works at Zippy's in Las Vegas. The company's new CEO recently announced that employees should enroll for 'self-management' training or else apply for a severance package (i.e., the compensation you get when you apply for earlier retirement). If John successfully completes the training, he estimates that the net present value (NPV) of employment at Zippy's until retirement is $600,000.
3. The CEO announced that only 30% of those enrolled in the training program will 'pass'. If John fails the training, his career prospects at Zippy's are limited and he would have to leave the company without a severance package. John is not willing to leave Las Vegas and, with his skill set, finding a new job may not be easy. He estimates that if he fails the training, the NPV of the remainder of his career is $300,000.
4. If John does not enroll in the training program he will be asked to leave the company and will receive a severance package. The severance package includes a sizable payout but it also has a no-compete clause, further limiting John's job options. Including the value of the severance package, he estimates that the total NPV in this case would be $400,000.
5. a) What should John do if he is risk-neutral (maximizes his expected profit)? what is the optimal decision? (10 points)

John recently met a labor consultant and asked her for advice. The consultant developed a test that can predict if someone willpassorfailthe type of training program Zippy's is offering. The consultant charges a fee of $10,000 for her service.

Of course John realizes that the test is unlikely to be perfect. After further discussion he finds out that the labor consultant's test has correctly predicted failure in 90% of cases (i.e., P(test result is "failure" | someone fails the training program) = 0.9). However, only in 60% of the cases did the test properly identify those that passed (i.e., P(test result is "pass" |someone passes the training program) = 0.6).

1. b)What is the probability of passing the training program given the test result is "pass"? (10 points)
2. c)What is the most John should pay the consultant? (10 points)