Alex, Who Is Risk-Neutral, Is Looking for an One-Bedroom Apartment

question 81

Multiple Choice

Alex, who is risk-neutral, is looking for an one-bedroom apartment to rent for the month of August while he's on vacation in Seattle. All of the one-bedroom apartments in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for $700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per month. The first apartment Alex finds rents for $700 per month. If the cost to Alex of searching for an apartment is $40, then searching for another apartment is a gamble with an expected value of:

• A)-$10.
• B)$0.
• C)$10.
• D)$20.

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Definitions:

Effective Tax Rate

The average percentage of income paid to the government in taxes, considering all deductions and credits.

Future Value

The value of a current asset at a specified date in the future based on an assumed rate of growth over time.

Deferral of Taxes

The postponement of taxes to a future period, commonly used in retirement savings plans and investment accounts.

Traditional Retirement Plan

A retirement savings plan that offers tax advantages to the saver, typically involving pre-tax contributions that grow tax-deferred until withdrawals begin at retirement.