Hideki Spends All of His Money on Movie Tickets and Groceries

question 120

Multiple Choice

Hideki spends all of his money on movie tickets and groceries. Suppose Hideki is presented with two options: A and B. Option A gives him a voucher of $X that he can only spend on groceries. Option B gives him $X that he can spend on either or both of the goods. Which of the following is correct?

• A) Hideki always prefers Option A to Option B.
• B) Hideki can never be indifferent between Option A and Option B.
• C) Hideki is always indifferent between Option A and Option B.
• D) Hideki can prefer Option B to Option A but cannot prefer Option A to Option B.

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Definitions:

Strike Price

The predetermined price at which an option's holder has the right to purchase (for a call option) or sell (for a put option) the underlying asset.

Option

An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified timeframe.

European Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy a certain asset at a specified price (strike price) on a specified date.