You Have the Choice of Two Equally Risk Annuities,each Paying

question 17

Multiple Choice

You have the choice of two equally risk annuities,each paying $5,000 per year for 8 years.One is an annuity due and the other is an ordinary annuity.If you are going to be receiving the annuity payments,which annuity would you choose to maximize your wealth?

• A) The annuity due
• B) The ordinary annuity
• C) Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better.
• D) Either one because they have the same present value.

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Definitions:

Constant Rate

A consistent, unchanging speed or pace at which something occurs or changes over time.

Diminishing Marginal Returns

The principle that adding an additional factor of production results in a smaller increase in output after a certain point.

Total Product

The total output or production by a firm using a given amount of inputs within a specific period.

Variable Input

A resource or factor of production whose quantity can be changed easily in the short term to adjust production levels.