Scenario 5.6: Consider the Information in the Table Below, Describing Choices for Choices

question 27

Multiple Choice

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.

-Refer to Scenario 5.6. The expected utility of income from research is:

• A) u($275,000).
• B) u($95,000).
• C) [u($500,000) + u($50,000)]/2.
• D) .1 u($500,000) + .9 u($50,000).
• E) dependent on which outcome actually occurs.

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Definitions:

Present Value

The current worth of a future sum of money or stream of cash flows, given a specified rate of return.

Discounting

The process of determining the present value of future cash flows by applying a particular interest rate; often used in investment and finance.

Present Value

The value today of a future amount of money or sequence of cash inflows, accounting for a defined rate of return.

Interest Rate

The percentage of a sum of money charged for its use, serving as the cost of borrowing or the reward for saving.