Professor Greedy has an annual income of AUD 200,0000. If he truthfully declares his income he...
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Professor Greedy has an annual income of AUD 200,0000. If he truthfully declares his income he has to pay AUD 50,000 in tax. Instead of doing that, Greedy decides not to declare his income. With probability of 50% he will get away with it and will not have to pay any tax, but with 50% probability he will be caught and has to pay AUD 100,000 (i.e. the tax plus a fine). A friend has offered Greedy to bet on a coin flip (win AUD 2,000 if heads and loose AUD 2,000 if tails is the outcome). Greedy told his friend that he would never accept such a gamble regardless how much money he has. Draw a graph with the same value function showing that Prospect Theory also predicts that Greedy rejects the 50:50 gamble on winning or losing AUD 2,000. Which feature of Prospect Theory is responsible for this? Upload your drawing and answer. Professor Greedy has an annual income of AUD 200,0000. If he truthfully declares his income he has to pay AUD 50,000 in tax. Instead of doing that, Greedy decides not to declare his income. With probability of 50% he will get away with it and will not have to pay any tax, but with 50% probability he will be caught and has to pay AUD 100,000 (i.e. the tax plus a fine). A friend has offered Greedy to bet on a coin flip (win AUD 2,000 if heads and loose AUD 2,000 if tails is the outcome). Greedy told his friend that he would never accept such a gamble regardless how much money he has. Draw a graph with the same value function showing that Prospect Theory also predicts that Greedy rejects the 50:50 gamble on winning or losing AUD 2,000. Which feature of Prospect Theory is responsible for this? Upload your drawing and answer.
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Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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