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An individual wants to start a business at which he expects to make 50,000$. Getting a license for the business costs 35,000$. The chance of getting caught without a license is 1/10, in which case he gets a fine of 50,000 $. Would he get a license if he is risk averse with utility U(x) = √x ? What happens if the probability of getting caught increases to ½? Can you propose an alternative to increasing law enforcement?

Microeconomics, Economics

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