Answered

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(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] .

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