Question
5. Suppose an employee is allowed to put before tax dollars into an account that can only be used for medical expenses during the
5. Suppose an employee is allowed to put before tax dollars into an account that can only be used for medical expenses during the year. The employee must decide at the beginning of the year how much is put into the account. Any money that is put into the account but not used during the year for medical expenses is lost. Assume that the employee marginal tax rate is 40%. (a) What is c in after tax dollars? (b) What is h in after tax dollars? (c) What is p in after tax dollars? (d) If the employee believes that the amount of medical expenses in the upcoming year will be normally distributed with mean $1500 and standard deviation $300, how much money should be put into the account to minimize expected cost?
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