Happily Ever After Three years into the project, Corin and Lancehave decided to get married. Because this union creates somedifficult tax decisions, the couple is carefully considering theiroptions. In particular, they are considering a risky tax strategythat often results in a tax audit. If their taxes are audited, itis certain that some “shortcuts” that Lance previously took will benoticed by the auditor, resulting in a substantial fine ($100,000).However, if there is no audit, then this tax strategy has thebenefit of delaying the required reporting date of some incomestreams. The value of this benefit is $5000. Their accountant, Ms.Weiss, has been provided some valuable information. Out of 100known cases where an audit took place, 40 of them involved therisky tax strategy that is being considered. In 500 known caseswhere no audit took place, 50 of them involved the risky taxstrategy. Ms. Weiss also knows that, barring any additionalinformation, tax audits have a probability of 0.01. If the coupledecides not to use the risky tax strategy, then they expect to seeno benefit or penalty.

i) Perform the appropriate analysis to help Ms. Weiss determineif the couple should use the tax strategy.

ii) Unbeknownst to Ms. Weiss, Corin and Lance have agreed thattheir interests can be accurately represented by the exponentialutility function U(x) = 1 – e-x/100. Will this cause Ms. Weiss togive a different recommendation? Why or why not?