Deck 11: Time and Uncertainty

Question 1

The value of a loan of $100,000 after a year at 5 percent interest is:

A) $5,000.
B) $95,000.
C) $105,000.
D) None of these is true.

Answer 1

C

Question 2

When people are deciding whether to deposit money in a bank:

A) everyone will respond exactly the same to any given interest rate.
B) some people will require a higher interest rate to deposit the same amount of money.
C) people don't accurately account for the risk of losing savings.
D) they will deposit the same amount in response to any given interest rate.

Answer 2

B

Question 3

The value of a loan of $50,000 after a year at 2 percent interest is:

A) $1,000.
B) $52,000.
C) $49,000.
D) None of these is true.

Answer 3

D

Question 4

The amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent is:

A) $1,600.
B) $41,600.
C) $40,400.
D) $160.

Question 5

Which of the following decisions are complicated by the value of money changing over time?

A) Buying a $100 concert ticket
B) Buying a $100 stock
C) Buying a $100 sweater
D) Buying a $100 blender

Question 6

The interest rate you typically earn on a deposit at a bank:

A) represents the price of your loan.
B) represents the risk of investing.
C) is the opportunity cost to you of lending money.
D) is the opportunity cost to a bank of lending money.

Question 7

The value of a loan of $2,000 after a year at 2 percent interest is:

A) $4,000.
B) $2,020.
C) $2,040.
D) $2,400.

Question 8

The interest rate:

A) is expressed as a percentage per dollar borrowed and per unit of time.
B) tells us how much less money is worth today than in the future.
C) exists only because lending is risky.
D) All of these statements are true.

Question 9

Benefits today cannot be directly compared with costs in the future because:

A) money today is worth more than money in the future.
B) people do not have perfect willpower and will waste money today.
C) investments aren't always profitable.
D) more information is needed to make investment decisions than is typically available.

Question 10

You can also think of interest as:

A) the cost of inflation.
B) the price of borrowing per dollar
C) the time it takes a bond to mature.
D) All of these statements are true.

Question 11

Rational people having preferences for immediate benefits and delayed costs is another way of saying that:

A) money is worth less to us now than in the future.
B) money is worth more to us now than in the future.
C) the value of money does not change over time.
D) rational people have insatiable wants.

Question 12

In order to compare benefits today with future costs,we need to know:

A) the interest rate.
B) the rate of inflation.
C) the uncertainty associated with future benefits and costs.
D) All of these statements are true.

Question 13

Value of a loan amount X with interest r after one period equals:

A) (X * 1)/(X * r)
B) X * (1 + r)
C) X/(1 + r)
D) All of these are true.

Question 14

Different banks:

A) may offer loans at different rates.
B) all offer loans at the same interest rate.
C) are mandated to follow the Fed's set interest rate.
D) never offer loans at exactly the same rates.

Question 15

Compounding is:

A) the process of accumulation of additional interest paid on interest that has already been earned.
B) the process of adding the percentage of interest times your initial principal yearly.
C) the process of deposits steadily increasing a set amount annually.
D) None of these statements is true.

Question 16

The amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent is:

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

Question 17

The amount of interest owed on a loan of $100,000 after a year at an interest rate of 3 percent is:

A) $3,000.
B) $30,000.
C) $103,000.
D) $100,300.

Question 18

The amount of interest owed on a loan of $75,000 after a year at an interest rate of 1 percent is:

A) $7,500.
B) $75,750.
C) $82,500.
D) None of these is true.

Question 19

The value of a loan of $500 after a year at 3 percent interest is:

A) $509.
B) $515.
C) $565.
D) $1,500.

Question 20

The value of money changes over time because:

A) there is an opportunity cost of waiting for money in the future.
B) people prefer to save money rather than spend it immediately.
C) the government collects taxes.
D) none of the reasons listed here cause the value of money to change over time.

Question 21

The future value of a deposit is:

A) PV * (1 + r) * n, where r = interest rate, n = periods, and PV = present value.
B) PV * (1 + r)n, where r = interest rate, n = periods, and PV = present value.
C) PV * rⁿ, where r = interest rate, n = periods, and PV = present value.
D) PV/(1 + r)n, where r = interest rate, n = periods, and PV = present value.

Question 22

Compounding:

A) is beneficial to savers, but costly to borrowers.
B) is beneficial to borrowers, but costly to savers.
C) is beneficial to borrowers and savers alike.
D) is costly to both borrowers and savers.

Question 23

Present value:

A) is always greater than the future value of money.
B) does not account for inflation.
C) is how much an amount of money obtained in the future is worth today.
D) All of these statements are true.

Question 24

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

Question 25

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

A) $125
B) $128
C) $1,268
D) $105

Question 26

The process of accumulation that occurs when interest is paid on previously earned interest is called:

A) present valuation.
B) backdating.
C) compounding.
D) front loading.

Question 27

Which of the following is closest to the future value of a $40,000 deposit earning 3 percent interest annually after 5 years?

A) $41,282
B) $46,021
C) $46,371
D) $41,150

Question 28

If you want to own $1 million when you retire in 45 years,how much should you put into your retirement fund now,given the interest rate is 3 percent?

A) $250,005.
B) $436,770.
C) $264,439.
D) $275,389.

Question 29

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

A) $205,087.
B) $212,051.
C) $305,194.
D) $195,085.

Question 30

The present value of $500,000 in 4 years at 7 percent interest is approximately:

A) $381,448.
B) $655,398.
C) $344,682.
D) None of these statements is true.

Question 31

Risk is:

A) when the costs or benefits of an event or choice are uncertain.
B) why the changing value of money is such a challenge.
C) to always be avoided, at any cost.
D) None of these statements is true.

Question 32

Present value is:

A) how much a certain amount of money that will be obtained in the future is worth today.
B) how much a certain amount of money that you have in the present will be worth in the future.
C) the process of accumulation of additional interest paid on interest that has already been earned.
D) how much a certain amount of money needs to be discounted to be meaningful.

Question 33

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

A) $312,451.
B) $187,379.
C) $427,126.
D) None of these statements is true.

Question 34

Knowing how to translate between present and future value can be useful when:

A) the benefits and opportunity cost occur at different times.
B) there are benefits and costs occurring at the same time.
C) the current costs are higher than the present benefits.
D) there are no benefits and costs.

Question 35

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

A) $1,120,262
B) $1,188,758
C) $1,201,204
D) $1,176,224

Question 36

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:

A) $80,000.
B) $100,000.
C) $150,000.
D) $125,000.

Question 37

If you knew that an investment was going to pay you $128 in 5 years,and you knew that the annual interest rate over that time would be 5 percent,you could calculate the present value to be:

A) $95.
B) $90.
C) $105.
D) None of these is true.

Question 38

To compute the present value of a future value,you must know the _________ and the _________.

A) interest rate; compounding interest
B) interest rate; time period
C) compounding interest; time period
D) None of these statements is true.

Question 39

If you knew that an investment was going to pay you $1,188,757 in 20 years,and you knew that the annual interest rate over that time would be 2 percent,you could calculate the present value to be:

A) $1,000,000.
B) $1,500,000.
C) $905,000.
D) $800,000.

Question 40

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:

A) $39,999.
B) $37,000.
C) $41,998.
D) $41,600.

Question 41

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.Kate is considering whether to play the second game.If Kate only cares about the expected value of the outcome and does not care about risk,she should:

A) not play since she never wins anything.
B) play if the cost of playing the game is greater than the expected value of the payoff.
C) compare the cost of playing the game with the value of her time.
D) play if the cost of playing the game is less than the expected value of the payoff.

Question 42

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.What is the probability of drawing a red marble in each game?

A) 10 percent in both games
B) 10 percent in the first game and 25 percent in the second game
C) 25 percent in the first game and 10 percent in the second game
D) 25 percent in both games

Question 43

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.What is the expected value of the payoff in the first game?

A) $5.75
B) $5.00
C) $4.75
D) $4.50

Question 44

Calculating expected value involves:

A) estimating how likely different outcomes are, and estimating the financial implications of each outcome.
B) predicting the most likely outcome and assuming that that event will occur.
C) assuming the worst outcome will occur and evaluating the financial implication of that outcome.
D) None of these statements is true.

Question 45

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.John should:

A) expand, since he expects to earn $320,000 by expanding, and it will only cost him $150,000 to do so.
B) not expand, because there is a chance John will earn the same as if he didn't expand and would be out the $150,000 investment.
C) not expand, since he expects to earn $120,000 more by expanding than not, and it will cost him $150,000 to do so.
D) expand, since he has a 70 percent chance of earning more than the cost of expansion.

Question 46

Evaluating risk requires that:

A) we think about different possible outcomes.
B) we accept that our best guess about future costs and benefits could be wrong.
C) we consider uncertain costs or benefits of an event or choice.
D) All of these statements are true.

Question 47

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.If John decides to expand based on expected value,it means that:

A) the difference in expected earnings from expanding versus not must exceed $150,000.
B) the sum of expected earnings from expanding and from not must exceed $150,000.
C) the difference in expected earnings from expanding versus not must not exceed $150,000.
D) his expected earnings from expansion must exceed $150,000.

Question 48

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.Jack decides to play the first game,and Kate decides to play the second game as described in the scenario.The expected value of the payoff:

A) is higher for Jack than for Kate.
B) is lower for Jack than for Kate.
C) is the same in both games, because there's only one red marble.
D) is higher in the second game because half the marbles entail a payback of at least what she pays to play the game.

Question 49

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.Jack is considering whether to play the first game.If Jack only cares about the expected value of the outcome and does not care about risk,he should:

A) not play the game, since it costs $5 and the expected payoff is $5.75.
B) play the game since it costs $5, and the expected payoff is $5.75.
C) play the game since it costs $5.75 and the expected payoff is $5.
D) not play the game since it costs $5.75 and the expected payoff is $5.

Question 50

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.What is the probability of drawing a blue marble in the first game?

A) 25 percent
B) 20 percent
C) 50 percent
D) 75 percent

Question 51

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.The expected value of the payoff is _____ for the first game and _____ for the second game.

A) $5.00; $4.50
B) $5.75; $4.50
C) $4.50; $5.75
D) $5.75; $5.25

Question 52

Expected value is:

A) the average of each possible outcome of a future event, weighted by its probability of occurring.
B) the average probability of all possible outcomes of a future event occurring, weighted by each possible outcome individually.
C) the sum of all probabilities of all possible outcomes of a future event occurring.
D) None of these statements is true.

Question 53

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.The difference in expected earnings if John chooses to expand versus not expand is:

A) $320,000.
B) $200,000.
C) $150,000.
D) $120,000.

Question 54

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.The expected value of John's earnings if he chooses to expand is:

A) $320,000
B) $230,000
C) $900,000
D) $140,000

Question 55

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.Kate decides to play the second game.Her probability of pulling out a green marble is:

A) 10 percent.
B) 40 percent.
C) 50 percent.
D) 75 percent.

Question 56

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.Assume Jack will play the games that have a higher expected payoff than the cost of playing the game.Comparing the expected value of the payoff of each game to the price of $5 to play,we can conclude that Jack should:

A) play the second but not the first.
B) play neither.
C) play the first but not the second.
D) play both.

Question 57

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.The expected value of John's earnings if he chooses not to expand is:

A) $400,000.
B) $200,000.
C) $250,000.
D) $225,000.

Question 58

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.If Jack only cares about expected value,and not risk,he should decide to play a game if:

A) the expected value of the payoff is higher than the price to play the game.
B) the expected value of the payoff is lower than the price to play the game.
C) the expected value of the payoff is higher than the expected value of the payoff in the other game.
D) the expected value of the payoff is double the price to play the game.

Question 59

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.To make the best decision,John should compare:

A) the expected value of his earnings if he doesn't expand with the expected value of his earnings if he does expand.
B) the difference in expected earnings if he does or does not expand to the cost of expansion.
C) the expected value of his earnings if he expands to the cost of expansion.
D) None of these statements is true.

Question 60

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.Kate decides to play the second game.Kate's expected value of payoff is:

A) $5.00.
B) $5.75.
C) $4.50.
D) $4.00.

Question 61

An insurance policy is a product that:

A) allows people to pay to reduce uncertainty in some aspect of their lives.
B) involves a company paying individuals very large sums of money if they encounter any risk.
C) involves individuals paying a company to ensure they don't experience any risk.
D) involves individuals paying a regular fee in return for an agreement that the insurance company will cover all expenses associated with risky behavior.

Question 62

Economists believe that individuals:

A) have varying tastes for taking on financial risks, but are risk-averse in general.
B) have the same tastes for taking on financial risks, and are risk-averse in general.
C) have varying tastes for taking on financial risks, but are risk-seekers in general.
D) have the same tastes for taking on financial risks, and are risk-seekers in general.

Question 63

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.John expects the value of his earnings to be ________ if he expands and ________ if he does not expand.

A) $320,000; $200,000
B) $170,000; $50,000
C) $120,000; $200,000
D) $30,000; $200,000

Question 64

Insurance policies can be bought to cover unexpected costs due to which kind of risk?

A) Fire damage to your home
B) Automobile theft
C) Fighting a rare disease
D) Individuals can buy insurance to cover all these risks.

Question 65

A risk-seeker is likely to:

A) buy a government bond instead of a stock.
B) put money in a savings account instead of investing in a start-up company.
C) invest in a start-up company instead of putting his money under his mattress.
D) put his money under his mattress instead of buying company stock.

Question 66

The trade-off between risk and expected value is exactly the kind of choice you have to make whenever you think about investing money in:

A) stocks.
B) retirement funds.
C) bonds.
D) One needs to think about the trade-off to invest in all these things.

Question 67

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

A) risk-seekers.
B) risk-averse.
C) low-risk players.
D) high-compensation players.

Question 68

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

A) the one with lower risk.
B) the one with higher risk.
C) the one with the higher opportunity cost.
D) the one with the lower future value.

Question 69

Someone who is risk-averse is likely to:

A) buy a government bond instead of a stock.
B) invest in a start-up company instead of putting her money under her mattress.
C) buy company stock instead of putting money in a savings account.
D) All of these statements are true.

Question 70

Someone is considered to exhibit risk-seeking behavior if he:

A) has a high willingness to take on situations with risk.
B) has a low willingness to take on situations with risk.
C) will only participate in high-risk situations.
D) will always choose the riskier venture when given two choices.

Question 71

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.If John were to expand,which of the following is true?

A) John's expected earnings are $50,000 less than if he didn't expand.
B) John can expect to earn $120,000 more by expanding, but that is less than the cost of expansion, $150,000.
C) John can expect to earn $120,000 more by expanding and therefore made the most profitable decision.
D) All of these statements are true.

Question 72

Economists believe that people are:

A) generally risk-seekers.
B) generally risk-averse.
C) always risk-averse.
D) always risk-seekers.

Question 73

People cope with uncertainty about the future:

A) exactly the same way, regardless of the situation.
B) in very similar ways, regardless of the situation.
C) in many ways, such as buying insurance.
D) by always avoiding it.

Question 74

If someone has a high willingness to take on situations with risk,he is considered:

A) risk-averse.
B) risk-seeking.
C) low-risk.
D) high-compensation.

Question 75

Risk-seeking behavior:

A) is irrational.
B) is an aspect of an individual's preferences.
C) is the same for everyone.
D) All of these statements are true.

Question 76

Risk aversion:

A) is the same for everyone.
B) is an unusual type of preference.
C) is an aspect of an individual's preferences.
D) All of these statements are true.

Question 77

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

A) the trade-off between future value and expected value.
B) the opportunity cost of the risk involved.
C) the trade-off between risk and expected value.
D) the opportunity cost of the expected value.

Question 78

The fee that insurance companies collect in exchange for covering unpredictable costs is called a:

A) premium.
B) ultimatum.
C) prepaid event charge.
D) preventative payment.

Question 79

One way people cope with uncertainty about the future is they:

A) avoid risks when it is reasonable to do so.
B) buy insurance.
C) only select risky alternatives if the expected value is twice as high as for a safe alternative.
D) All of these are ways individuals cope with uncertainty.

Question 80

When people are considered risk averse,they:

A) generally have a low willingness to take on risk.
B) generally have a high willingness to take on risk.
C) will only participate in low-risk activities.
D) will never accept risk in any situation.