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Author Question: You have won a contest and are allowed to choose between two prizes. One prize is 200 today and ... (Read 29 times)

MirandaLo

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on: Jul 1, 2018
You have won a contest and are allowed to choose between two prizes. One prize is 200 today and another 200 one year from now. The other prize is 100 today and an additional 325 one year from now.
 
  At what interest rate (if any) would you be indifferent between the two prizes?

Question 2

Refer to Scenario 10.2. What is the profit maximizing level of output?
 
  A) 0
  B) 90
  C) 95
  D) 100
  E) none of the above


lgoldst9

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Reply #1 on: Jul 1, 2018
Answer to Question 1

Prize 1 has PDV = 200 + 200/(I + R)
Prize 2 has PDV = 100 + 365/(I + R)
Equating the PDV for prize 1 and prize 2 and solving for R yields:
200 + 200/(l + R) = 100 + 365/(l + R)
R = 0.25

Answer to Question 2

C


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