You have received two job offers. Firm A offers topay you $85,000 per year for two years. Firm B offers to payyou $90,000 for two years. Both jobs areequivalent. Suppose that firm As contract is certain,but firm B has a 50% chance of going bankrupt at the end of theyear. In that event, it will cancel your contract and pay youthe lowest amount possible for you to not quit. If you didquit, you expect you could find a new job paying $85,000 per year,but you would be unemployed for 3 months while you search forit.

a.) Say you took the job at firm B, what is theleast firm B can pay you next year in order to match what you couldearn if you quit?

b.) Given your answer to part (b), and assumingyour cost of capital is 5%, which offer pays you a higher presentvalue of your expected wage?

c.) Based on this example, discuss one reason whyfirms with a higher risk of bankruptcy may need to offer higherwages to attract employees.