Exam 10: A: Asset Markets

Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth. But Shivers has a larger house. Shivers's annual fuel bill for home heating is 1,200 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 1,200 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 13,200 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

If the interest rate is 5% and will remain 5% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,300 dollars 1 year from now, 1,102 dollars 2 years from now, and nothing at any other time?

The sum of the terms of the infinite geometric series 1, 0.83, 0.83², 0.83³, . . . is closest to

Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth. But Shivers has a larger house. Shivers's annual fuel bill for home heating is 1,100 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 1,100 dollars, plan B would cost him 2,000 dollars, and plan C would cost him 12,100 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 40 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 20 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

If the interest rate is 19% and will remain 19% forever, how much would a rational investor be willing to pay for an asset that will pay him 2,380 dollars 1 year from now, 1,416 dollars 2 years from now, and nothing at any other time?

Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth. But Shivers has a larger house. Shivers's annual fuel bill for home heating is 1,200 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 1,200 dollars, plan B would cost him 1,900 dollars, and plan C would cost him 13,200 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

If the interest rate is 13% and will remain 13% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,780 dollars 1 year from now, 1,276 dollars 2 years from now, and nothing at any other time?

The price of an antique is expected to rise by 9% during the next year. The interest rate is 11%. You are thinking of buying an antique and selling it a year from now. You would be willing to pay a total of 900 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay to buy this antique? (See Problem 5.)

If the interest rate is 15% and will remain 15% forever, how much would a rational investor be willing to pay for an asset that will pay him 3,450 dollars 1 year from now, 1,322 dollars 2 years from now, and nothing at any other time?