A lottery promises a $250,000 prize. But the prize money is paid out in $50,000
ID: 1195424 • Letter: A
Question
A lottery promises a $250,000 prize. But the prize money is paid out in $50,000 annual installments with the first installment received today.. The winner is offered the option of an immediate lump-sum payment. If the interest rate remains at 10 percent for the entire period, what is the smallest amount the winner should accept?
a.
$189,540
b.
$192,970
c.
$208,494
d.
$225,000
68. What type of cost is not relevant to the process of research and development or invention in general?
a.
fixed cost
b.
marginal cost
c.
variable cost
d.
social cost
69. If wages decrease and workers choose to work more hours or more shifts, their behavior is evidence of
a.
the substitution effect.
b.
the income effect.
c.
rational expectations.
d.
rational ignorance.
a.
$189,540
b.
$192,970
c.
$208,494
d.
$225,000
Explanation / Answer
Answer 67 c. 208494
NPV of 2,50,000 received today = 50000 +50000/1.10 +50000/(1.10)2 +50000/(1/10)3 50000/(1.10)4
50000+45454.45+41322.31+ 37565.74+34150.67 = 2,08,494
Answer 68. d. Social Cost
Answer 69 a. Substitution Effect because labour is substituting leisure with income
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