Answered

IDNLearn.com is the place where your questions are met with thoughtful and precise answers. Discover prompt and accurate answers from our experts, ensuring you get the information you need quickly.

(1) You are given 2 choices:
(a) getting $500,000 tax-free for sure, and (b)taking a chance on a gamble that has a probability p of getting $1 million tax-free and probability 1-p of getting nothing. Clearly, if probability p is 100% in the gamble, as a rational and sane person, you will choose the gamble because you will have a 100% chance of getting $1 million; on the other hand, if p is 0%, you will choose $500,000 for sure. Now, by gradually reducing the probability p of getting $1 million in the gamble from 100% towards 0, find the probability p* for you will feel choice
(b) has about the same degree of attractiveness or desirability as (a) to you. Use p* to compute your utility of $500,000.
(2) Repeat (1) by changing choice (a) to getting $200,000 tax-free for sure. Note: the probability p* for the case will generally be smaller than the one for (1).

Sagot :

Answer:

The answer is "0.02%"

Step-by-step explanation:

It will propose the percentage model i.e ([tex]\frac{500000}{100}=5000[/tex]) to find a good bid Therefore one percentage means [tex]\$5000[/tex] or one individual gets [tex]\$5000[/tex] taxable income if the probability is [tex]1\%[/tex] . For even a chance of [tex]2\% \ of \ \$10000[/tex] 

However if we increase the chances of 0-100% the amount also increases accordingly from 0-1 million, we get much more than $500,000 also as the degree of attraction. In[tex]\$200,000[/tex] respectively [tex]0-100\%[/tex] implies that its total will rise appropriately from [tex]0-\$200,000[/tex]. Thus, p* is at [tex]50\% =\$ 100,000[/tex] .

Your participation means a lot to us. Keep sharing information and solutions. This community grows thanks to the amazing contributions from members like you. Find reliable answers at IDNLearn.com. Thanks for stopping by, and come back for more trustworthy solutions.