Exam 15: Trade-Offs Involving Time and Risk

Scenario: Suppose you deposit $520 in a bank for a period of 1 year. The interest rate offered by the bank is 10 percent per year. -Refer to the scenario above.The total value in your account at the end of a year is equal to ________.

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 blue ball from the box?

Scenario: Trinity deposits $8,000 in a bank at an interest rate of 8 percent per year compounded annually. -Refer to the scenario above.What will be the future value of the deposit after 3 years?

What are the different categories of risk preferences? Explain.

Scenario: A friend approaches you with four different investment plans that offer you the following returns on an investment of $10,000. Plan 1: promises a return of $20,000 in 5 years Plan 2: promises you a return of $5,000 in 2 years and $2,000 in 3 years Plan 3: promises you a return of $20,000 in 20 years Plan 4: promises you a return of $15,000 in 10 years The market rate of interest is 5 percent. -Refer to the scenario above.The present value of the positive cash flows from the investment in Plan 2 is equal to ________.

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 time value of the amount deposited is ________.

Which of the following statements is true?

George is offered an investment option by his friend.He asks George for $6,900 and offers to repay $12,990 to him after a period of 10 years.George considers investing his money in his friend's project; however,the bank in his community offers an annual rate of interest of 9 percent on every deposit.Which do you think is the better investment option for George?

In present value,if 140 delayed utils are only worth 70 utils now,the discount weight must be equal to ________.

Scenario: Susan discounts delayed utility with a weight of $\frac{1}{2}$ , and Jim discounts delayed utility with a weight of 1/4. Both individuals win gift vouchers, which can be used after a year. Both Susan and Jim estimate the utility of the gift vouchers at 90 utils. -Refer to the scenario above.If both individuals are offered movie tickets worth 40 utils today instead of the gift voucher,then which of the following statements is true?

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 $100,and in the case of tails,the individual loses $50,the expected value of the gamble changes to ________.

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent. -Refer to the scenario above.What is the present value of Option B?

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 principal in this case is ________.

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 future value of Wendy's deposit after 1 year?

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 future value of John's deposit after 1 year?

________ is the payment received for temporarily giving up the use of money.

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.People will earn a net benefit of ________ if the discount weight of the future benefit is $\frac{1}{10}$ .

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 future value of Wendy's deposit after 3 years?

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 future value of John's deposit after 3 years?

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent. -Refer to the scenario above.What is the present value of Option C?