Aunt Clarisse Has Promised to Leave You an Annuity That

question 29

Multiple Choice

Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%. What is the value of the growing perpetuity?

• A) $667
• B) $693
• C) $1,200
• D) $1,248

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Definitions:

Consumer Surplus

The deviation between the full cost that consumers are willing and are financially suitable to pay for a product or service, and the cost they ultimately pay.

Individual Consumer Surplus

The net gain to an individual buyer from the purchase of a good; equal to the difference between the buyer’s willingness to pay and the price paid.

Selling Haircuts

The commercial activity of providing hair cutting and styling services to customers for a fee.

Efficiency

The degree to which resources are allocated in a way that maximizes productivity and minimizes waste or inefficiency.