Bobby faces two choices. The first is to receive 600 on the spot. The other choice is to receive 800 a year from now. The interest rate is 5 per year. What could a possible explanation for Bobby choosing to receive 600 on the spot?
A) Bobby finds that the present value of the 800 a year from now is less than 600.
B) Bobby may have time-inconsistent preferences.
C) Although Bobby chooses 600 on the spot, he is actually indifferent between the two options.
D) None of the above is correct.
Question 2
Billy is considering the purchase of a rental house. The house costs 240,000 and it will generate annual revenues of 15,000 and annual expenses of 3,000. Nevertheless, Billy will need to borrow 240,000 at an interest rate of 7 per year in case he decides to make this investment. Should Billy purchase this house?
A) No, he will lose money.
B) Yes, his profits will be zero.
C) No, his profits will be positive but close to zero.
D) Yes, he will profit from this investment.
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