Suppose Someone Offered You Your Choice of Two Equally Risky

question 60

Multiple Choice

Suppose someone offered you your choice of two equally risky annuities,each paying $5,000 per year for 5 years.One is an annuity due,while the other is a regular (or deferred) annuity.If you are a rational wealth maximizing investor,which annuity would you choose?

• A) The annuity due
• B) The deferred annuity
• C) Either one, because as the problem is set up, they have the same present value.
• D) Without information about the appropriate interest rate, we cannot find the value of the two annuities, hence we cannot tell which is better.
• E) The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.

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Definitions:

Habituate

The process by which an organism becomes accustomed to a stimulus after repeated exposure, leading to a decrease in response.

Dominant Action

The primary or most influential action in a series of movements or decisions, often leading or setting a precedent.

Cognitive Development

The process by which a person's ability to think, reason, perceive relationships, and solve problems emerges and evolves over time.

Sensorimotor

A stage in Piaget's theory of cognitive development where infants learn to interact with their environment through sensory experiences and motor actions.