Risk Aversion October 12, 2015
An increase in $1,000 a year on property tax will have a bigger impact on the rich or the poor? Explain in your own words why.
Krieder’s example for the Monday:
Basic concept: Say that you weren’t born yet and you don’t know where you will be born or who your family will be. BUT you are somehow elected into congress (unborn) and in charge of voting for tax distributions, there are 2 main ideas.
Option A: Low class, Middle class, and High-class will all be taxed a base of $7,000 off of their annual income tax every December.
Option B: With each paycheck, every class will be taxed 30% of their annual income.
In your situation, you will enter an unknown American family next year. You don’t know your future family’s income. Which decision are you most likely to vote for? Explain your answer and try to fit the word “risk aversion” into your explanation.
Create a graph and answer the questions:
You were given $250 for the weekend. Your friends convince you to go to the casinos and play the slots. In this particular slot, you can only spend an entire $25.00 at a time. You can either win $50 back or nothing at all.
$225 = 106 Utils
$235 = 117 Utils
$240 = 122 Utils
$245 = 125 Utils
$250 = 127 Utils
$275 = 136 Utils
What is the “cost” of the gamble? Should you play the slot?
Your friend Mikey dares you to play the slot. Earning the name “dare-devil gambla’”, you aren’t one to say no to a dare. Ever. You have to do it. But you want to see if you can make a deal and pay Mikey an amount of money to call off the dare.
How much are you willing to pay Mikey to avert this risk? $5, $10, $15
Mikey makes a deal to call it off if you give him $5, what do you do?
Mikey makes a deal to call if off if you give him $10, what do you do?
Mikey makes a deal to call if off if you give him $15, what do you do?