Exam 15: Trade-Offs Involving Time and Risk

Which of the following is most likely to reduce an individual's current spending?

Scenario: A bag contains ten green balls, five blue balls, and fifteen yellow balls. If an individual picks a green ball from the bag, she wins $200. If she picks either a blue ball or a yellow ball, she loses $300. -Refer to the scenario above.What is the probability of winning?

Consider two individuals,Kevin and Harris,who discount delayed utilities with a weight of $\frac{1}{2}$ and $\frac{3}{4}$ ,respectively. a)Of the two individuals,who gives more weight to things that happen in the future? b)If consuming ice cream gives both Kevin and Harris benefits worth 8 utils instantly and it has delayed costs of 15 utils,then comment on whether both individuals will want to consume ice cream. c)If the nearby ice cream parlor is closed for a week,will Kevin and Harris prefer to eat ice cream after a week,given that they have to decide today?

Scenario: Suppose the government decides to levy a tax on the emission of greenhouse gases. The tax on the emission of greenhouse gases has been estimated to provide a future benefit of 1,000 utils, while the current cost of the tax imposed is 700 utils. -Refer to the scenario above.Suppose that the decision to levy a tax on the emission of greenhouse gases costs 500 utils in present value and that the discount weight attached to the future benefit is $\frac{1}{17}$ .In this case,the net benefit earned by the people is ________ utils.

Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years. -Refer to the scenario above.What will be the balance in Tom's account after 5 years if he deposits $3,000 in the bank?

An individual deposits a certain amount of money in a bank.The amount deposited is referred to as ________.

Scenario: George deposits $1,000 in a bank for a period of 1 year. After 1 year, he receives $1,300. -Refer to the scenario above.The future value of the initial deposit after 1 year is ________.

The present value of a sum of money to be received in the future is high if the ________.

Scenario: John is planning to buy a cell phone. The market price of the cell phone is $200. While making the purchase, along with the regular replacement warranty for a year, he is also offered an extended warranty for 2 more years at a price of $50. The probability of the phone malfunctioning each year is 20 percent. It is also expected that a similar phone will cost $150 after the end of the first year and $100 after the end of the second year. The current market rate of interest is 10 percent. -Refer to the scenario above.What is the value of having the extended warranty during the third year of ownership?

The ________ of a future payment is the amount of money that needs to be invested today to produce the future payments.

Which of the following represents the correct formula for present value?

What is the present value of $50,000 to be received after 1 year if the market rate of interest is 8 percent per year?

Scenario: An unbiased coin is tossed, and if the outcome is heads, an individual wins $50. If the outcome is tails, the individual has to pay $50. -Refer to the scenario above.If the rules of the gamble are changed such that in the case of heads,the individual wins $50,and in the case of tails,the individual loses $100,the expected value of the gamble changes to ________.

Scenario: Frank has two options: hot dogs and ice cream. Frank derives a current utility of 8 utils from hot dogs and a current utility of 10 utils from ice cream. He also estimates the delayed costs in terms of health effects from both options. The delayed costs from hot dogs are estimated at 14 utils, and the delayed costs from ice cream are estimated at 12 utils. -Refer to the scenario above.If Frank discounts delayed utilities with a weight of $\frac{8}{10}$ ,then which of the following statements is true?

John deposits $800 in a bank at an annual interest rate of 6 percent.The total amount in John's account after 1 year will be ________.

Scenario: A roulette wheel has fifty pockets numbered from 1 to 50. An individual may bet on more than one pocket on the wheel. -Refer to the scenario above.If the individual places her bet on ten pockets,her likelihood of winning is ________ percent.

Jerry is interested in purchasing a washing machine.The price of the machine is $500,and it comes with a 1-year warranty.The probability that the machine will break down is 20 percent every year.If the machine breaks down in the second year and Jerry holds a warranty,he receives a new washing machine worth $400 that year.If the machine breaks down after 3 years and he holds a warranty,he receives a new machine that is worth $300 after the third year.The price of a warranty for 3 years is $150.The market interest rate is 5 percent.Is buying the warranty a good investment for Jerry? Explain your answer.Show all the necessary calculations.

Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent. -Refer to the scenario above.What will be the difference between the future values of John's deposit and Wendy's deposit after 1 year?

Scenario: A box has three green balls, six blue balls, and nine red balls. -Refer to the scenario above.What is the probability of picking a red ball from the box?

Which of the following is most likely to reduce an individual's future spending?