Zelda won the jackpot on a penny slot machine in Las Vegas and is given the following three options to receive her jackpot:
Option 1: $100,000 to be received right away, with four additional payments of $100,000 to be received each year for the next four years.
Option 2: $250,000 to be received right away with two additional payments of $100,000 to be received each year for the next two years.
Option 3: $400,000 to be received right away.
Which option should Zelda choose if the interest rate is 8%? Would she choose the same option if the interest rate was 10%? Why?
If the interest rate is 8%:
Option 1: Present value = $100,000 + [$100,000 / (1 + 0.08)] + [$100,000 / (1 + 0.08)2] + [$100,000 / (1 + 0.08)3] + [$100,000 / (1 + 0.08)4] = $431,212.67
Option 2: Present value = $250,000 + [$100,000 / (1 + 0.08)] + [$100,000 / (1 + 0.08)2] = $428,326.47
Option 3: Present value = $400,000.00
Zelda should choose Option 1 since the present value is the highest.
If the interest rate is 10%:
Option 1: Present value = $100,000 + [$100,000 / (1 + 0.10)] + [$100,000 / (1 + 0.10)2] + [$100,000 / (1 + 0.10)3] + [$100,000 / (1 + 0.10)4] = $416, 986.55
Option 2: Present value = $250,000 + [$100,000 / (1 + 0.10)] + [$100,000 / (1 + 0.10)2] = $423,553.72
Option 3: Present value = $400,000.00
Zelda should choose Option 2 since the present value is the highest.
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Use the above figure. The economic profit for this firm is
A) zero. B) the distance between T and E. C) the distance between E and x-axis. D) the distance between T and x-axis.
In the short run, if a firm shuts down, its total revenue is
a. $0 b. equal to its fixed costs c. greater than its variable costs d. greater than its fixed costs e. less than its variable costs
Suppose a consumer buys pizza (P) and soft drinks (S). The price of pizza is $10, the price of soft drinks is $2 and the consumer's income is $100. If pizza is measured on the vertical axis and soft drinks are measured on the horizontal axis, then the consumer's budget constraint is given by:
A. P = 10 - (1/5)S B. S = 10 - (1/5)P C. P = 100 - 5S D. P = 10 - 5S