**BN10.3 Case Study: Strategic Grant Decision****Scenario:**Your non-profit organization has been awarded a special government environmental clean-up grant of **$90,000**. You have the option to accept the $90,000 now or delay and wait for the amount to be processed next year. With an election approaching, the grant amount for next year will fluctuate depending on the outcome of the election. Assuming that future money holds the same value as money today, the potential grant amounts based on election results are:- **Outcome and Grant Details:** | Outcome | Grant Amount | Probability | |--------------------------------------|--------------|-------------| | Democrats control everything | $160,000 | 0.25 | | Republicans control everything | $36,100 | 0.25 | | Split government | $90,000 | 0.50 |**Assumptions:**Your **Payoff** in each scenario, as defined by your utility function, is the square root of the grant amount (sqrt).**Question:**Should you accept the money **today** or opt to **wait until next year**? Provide a detailed response that includes calculations for the **Expected Value** and **Expected Utility** of both options.

The amount of the grant is $90,000. If we take the grant today, then we get $90,000. But if we wait until next year, then the amount of grant depends on which party wins. Also, the value of money in both periods is the same means there is 0% inflation. Payoff function: Here w denotes the amount of money. A rational consumer aims to maximize the expected utility instead of the expected monetary value. For example, if a consumer is faced with a choice between a certain outcome and a risky outcome, the consumer evaluates these options not only based on expected monetary values but also on their personal risk preferences. They might prefer a certain outcome over a riskier one, even if the expected monetary value is the same.The expected value received for the next year is calculated asPutting valuesNow, determining the expected utility:The total utility if we receive 90,000 today is calculated below:The expected utility is less than the utility of 90,000 today. This represents the consumer is risk averse. Therefore, the best option is to accept $90,000 today.The expected utility is less than the utility of 90,000 today. Therefore, the best option is to accept $90,000 today.

Answered: Your non-profit has just been awarded a…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter16: The Markets For Labor, Capital, And Land

Section: Chapter Questions

Problem 12P

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**BN10.3 Case Study: Strategic Grant Decision**

**Scenario:**

Your non-profit organization has been awarded a special government environmental clean-up grant of **$90,000**. You have the option to accept the $90,000 now or delay and wait for the amount to be processed next year. With an election approaching, the grant amount for next year will fluctuate depending on the outcome of the election. Assuming that future money holds the same value as money today, the potential grant amounts based on election results are:

- **Outcome and Grant Details:**

| Outcome | Grant Amount | Probability |
|--------------------------------------|--------------|-------------|
| Democrats control everything | $160,000 | 0.25 |
| Republicans control everything | $36,100 | 0.25 |
| Split government | $90,000 | 0.50 |

**Assumptions:**

Your **Payoff** in each scenario, as defined by your utility function, is the square root of the grant amount (sqrt).

**Question:**

Should you accept the money **today** or opt to **wait until next year**? Provide a detailed response that includes calculations for the **Expected Value** and **Expected Utility** of both options.

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