Bobby Faces Two Choices

question 24

Multiple Choice

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.

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Definitions:

Optimal Consumption

The mix of goods and services that maximizes a consumer's utility given their budget constraints.

Initial Endowment

The initial quantity of goods, services, or resources an individual, institution, or country possesses at the start of an economic analysis.

Relative Prices

The price of one good or service compared to another, indicating their exchange rate in the market.

Normal Good

A type of good for which demand increases when income increases and falls when income decreases, with other factors being constant.