(Optional, requires appendix) An auditor for the IRS is reviewing Wanda’s latest tax return (see…

(Optional, requires appendix) An auditor for the IRS is
reviewing Wanda’s latest tax return (see Exercise S10), on which she reports
having had a bad year. Assume that Wanda is playing according to her
equilibrium strategy and that the auditor knows this.

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(Optional, requires appendix) An auditor for the IRS is reviewing Wanda’s latest tax return (see…
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(a) Using Bayes’ rule, find the probability that Wanda
had a good year given that she reports having had a bad year.

(b) Explain why the answer in part (a) is more or less
than the baseline probability of having a good year, 0.6.

 

 

 

 

 

 

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