Exam 15: Trade-Offs Involving Time and Risk

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.If the investor plans to invest a sum of $4,000,the net present value of Option B is ________.

A(n)________ weight multiplies delayed utils to translate them into current utils.

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.What is the present value of the gift voucher to Jim?

The ________ of a project is the sum of all the costs and benefits associated with the project,using present values to make the costs and benefits comparable.

Scenario: Consider the following two options. You can either invest $30,000 in a bank that offers you an interest rate of 6 percent compounded annually for 30 years, or you can lend $30,000 to your friend for 30 years at an interest rate of 10 percent compounded annually. -Refer to the scenario above.If you invest your money in the bank,you will receive ________ on maturity.

When economists expect that a reward might not occur,they incorporate the uncertainty by multiplying the reward by a ________.

A die is rolled,and if the outcome is an even number,a gambler receives $10.If the outcome is an odd number,the gambler loses $10.What is the expected value of this game?

Which of the following statements is true?

If an individual discounts delayed utils with a weight of 1/4,the present value of 90 utils to be received after a year is ________ utils.

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.If the investor plans to invest a sum of $4,000,which of the following statements is true?

The probability of an event is the ________.

An individual receives $100 if the outcome of a coin toss is heads.If the outcome of the coin toss is tails,he loses $50.If the individual weights future losses by a special factor of 2,what is the psychological value of this coin toss?

Which of the following statements is true?

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 $\frac{1}{4}$ ,then which of the following statements is true?

A probability weighted value is referred to as a(n)________ value.

The net present value of a project equals ________.

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 his bet on four pockets,his likelihood of winning is ________ percent.

Scenario: Your friend and you decide to bet on a baseball game. You offer to pay $200 if you lose the bet, and your friend has to pay $100 if you win the bet. The probability of your winning or losing the bet is $\frac{1}{2}$ . -Refer to the scenario above.The average payoff of the bet is ________.

Which of the following examples correctly identifies preference reversals?

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.What is the probability of getting tails?