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Exam 11: Time and Uncertainty

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Question 1

Multiple Choice

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Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest annually after 10 years?

A) $4,122
B) $4,876
C) $5,025
D) $4,805

E) A) and B)
F) All of the above

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Question 2

Multiple Choice

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What is the amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent?

A) $2,100
B) $2,200
C) $200
D) $100

E) B) and D)
F) None of the above

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Question 3

Multiple Choice

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The present value of $300,000 received in 12 years at 4 percent interest is approximately:

John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.What is the expected value of John's revenue if he chooses to expand?

If you knew that an investment was going to pay you $46,370 in 5 years, and you knew that the annual interest rate over that time would be 3 percent, you could calculate the present value to be:

John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.What should John do?

Julia is thinking about leaving her place of work and starting her own business. If she stays with her company, there is an 85 percent chance that she will remain in her current role earning $40,000 per year and a 15 percent chance that she will receive a promotion and earn $50,000 per year. If she starts her own business, there is a 30 percent chance she'll earn $60,000 per year; a 20 percent chance she'll earn $80,000 per year; and a 50 percent chance she'll earn $20,000 per year. Which of the following statements is true?If Julia is risk averse, she will definitely prefer to stay with her current company.If Julia is risk neutral, she will definitely prefer to start her own business.The expected value of Julia's earnings is $44,000 if she starts her own business.

Which of the following is a mechanism for reallocating risk?

A deposit of $50,000 after a year at 2 percent interest is valued at:

Risk pooling:

Economists assume that, in general, when individuals are faced with two choices that have the same expected value, they will prefer the choice with:

Diversification:

John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.John decides to expand. Which of the following is true?

Individuals who are thinking about investing money in stocks, bonds, or real estate must consider:

Those who generally have a low willingness to take on risk are said to be:

Shayla is thinking about leaving her place of work and starting her own business. If she stays with her company, there is an 80 percent chance that she will remain in her current role earning $50,000 per year and a 20 percent chance that she will receive a promotion and earn $60,000 per year. If she starts her own business, there is a 40 percent chance she'll earn $80,000 per year; a 10 percent chance she'll earn $100,000 per year; and a 50 percent chance she'll earn $20,000 per year. Which of the following statements is true?

When people are considered risk averse, they:

The present value of $250,000 received in 10 years at 2 percent interest is approximately:

If you knew that an investment was going to pay you $215,892.50 in 10 years, and you knew that the annual interest rate over that time would be 8 percent, you could calculate the present value to be:

Which of the following is closest to the future value of a $100 deposit earning 5 percent interest annually after 5 years?