Employees of Georgia-Atlantic are permitted to contribute a portion of their earnings (in increments of $500) to a flexible spending account from which they can pay medical expenses not covered by the company’s health insurance program. Contributions to an employee’s “flex” account are not subject to income taxes. However, the employee forfeits any amount contributed to the “flex” account that is not spent during the year. Suppose Greg Davis makes $60,000 per year from Georgia- Atlantic and pays a marginal tax rate of 33%. Greg and his wife estimate that in the coming year their normal medical expenses not covered by the health insurance program could be as small as $500, as large as $5,000, and most likely about $1,300. However, Greg also believes there is a 5% chance that an abnormal medical event could occur which might add $10,000 to the normal expenses paid from their flex account. If their uncovered medical claims exceed their contribution to their “flex” account, they will have to cover these expenses with the after-tax money Greg brings home.

Use simulation to determine the amount of money Greg should contribute to his flexible spending account in the coming year if he wants to maximize his disposable income (after taxes and all medical expenses are paid). Use 5000 replications for each level of “flex” account contribution you consider.