Harold has visited a casino and paid an entry fee of $20,000 to play the game of cards. Below is the payoff table in terms of the decision to play or not to play the game (Note: Harold will not pay the entry fee if he does not want to play and the below payoff table includes the entry fee):
a. In his previous visits, Harold has won 1 out of every 5 games that he has played. Use the expected value approach to recommend a decision.
b. Assume that the utilities for 50,000 and -20,000 are 10 and 0, respectively. If a particular decision maker assigns an indifference probability of 0.0001 to the $0 payoff, would Harold play the game? Use expected utility to justify your answer.
Definitions:
Personal/Rental
Pertaining to property that is used for personal purposes at times and rented out at others, often affecting tax implications.
Schedule E
Schedule E is a form used for tax filing that reports supplemental income and loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests.
Schedule D
A form used with the U.S. federal income tax return to report capital gains and losses from the sale, exchange, or disposition of capital assets.
Mortgage Interest
The interest charged on a loan used to purchase a residence, which can be deductible for taxpayers who itemize deductions on their income tax returns.
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