Congratulations!You have just won a $1,000,000 (delayed) prize in the lottery. Your state offers you the following alternatives:you can take $750,000 now, or 10 years from now you can receive the full $1,000,000
The delay isn't a problem, because you weren't planning to use any of the prize money for at least 10 years. If you take the lump sum now, you figure you can invest it at an annually compounded rate of 3 percent. Should you take the $750,000 now, or wait to get the full $1,000,000 in 10 years?Why or why not?Show any calculations.
You should take the $750,000 now.
Here are the relevant calculations:
$750,000 × (1 + 0.03)10 = $1,007,937.
So you would be $7,937 better off by taking the smaller amount now than receiving the full prize in 10 years.This assumes that you will, in fact, achieve an annually compounded return of 3 percent for the next 10 years.
A-head: INVESTMENT RETURNS
Concept: Comparing future values
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Which of the following statements is true of world GDP before 1800?
A) The entire world population was living above the subsistence level of income. B) The GDP per capita in all nations was less than $500. C) Most of the countries were growing at a rate of more than 6% per year. D) Increase in GDP resulted in increase in consumption but not investment.
A change in quantity supplied of a product is the result of a change in
A) the price of the product. B) consumer income. C) the cost of producing the product. D) the state of production technology.
The opportunity cost of producing more of one good on a production possibilities frontier is
A) a dollar amount. B) a ratio of quantities. C) a ratio of prices. D) equal to the area inside the production possibilities frontier. E) a theoretical concept which cannot be measured.
Exhibit 3A-1 Comparison of Market Efficiency and Deadweight Loss
As shown in Exhibit 3A-1, if the market is in equilibrium, then ____ represents total surplus.
A. ABEFD B. ABEC C. EFG D. BEF