Pat Won a Lottery with Two Options: $1 Million Per

question 39

Multiple Choice

Pat won a lottery with two options: $1 million per year, at the beginning of the year, for 25 years or a single cash price of $18 million. If low-risk investments can earn 2.5% compounded annually, which option should Pat choose and what is the advantage in terms of current economic value?

• A) Lump sum has an advantage of $885 000
• B) 25 year annuity has an advantage of $885 000
• C) 25 year annuity has an advantage of $424 000
• D) Lump sum has an advantage of $424 000
• E) Both options are the same

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Definitions:

Constant Unit Cost

The situation where the cost to produce each additional unit of output remains unchanged.

Inverse Demand Curve

A graphical representation showing the relationship between the price of a good and the quantity demanded, plotted with price on the y-axis and quantity on the x-axis, inversely.

Cartel

An agreement among competing firms to control prices, production, and distribution of goods, often to restrict competition and maximize profits.

Price Elasticity

A metric that quantifies the sensitivity of the quantity of a product demanded to fluctuations in its price, depicted as a percentage alteration.