John Doe Wins the Lottery and May Pick from the Following

question 10

Multiple Choice

John Doe wins the lottery and may pick from the following three choices:
Take $750,000 now.
Take $1,000,000 ten years from now.
Take $90,000 at the end of this year, and at the end of each following year for ten installments in total.
Assume that John Doe uses a discount rate of 5% to evaluate his choices. If he selects the second option, how much is the present value of that alternative?
$$\begin{array} { | r | r | r | r | r | r | r | } \hline\begin{array} { l } \text { Present } \\\text { Value of } \\\text {\$1 }\end{array} & & & & & & \\\hline& 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\\\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.823 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\\hline 6 & 0.746 & 0.705 & 0.666 & 0.630 & 0.596 & 0.564 \\\hline 7 & 0.711 & 0.665 & 0.623 & 0.583 & 0.547 & 0.513 \\\hline 8 & 0.677 & 0.627 & 0.582 & 0.540 & 0.502 & 0.467 \\\hline 9 & 0.645 & 0.592 & 0.544 & 0.500 & 0.460 & 0.424 \\\hline 10 & 0.614 & 0.558 & 0.508 & 0.463 & 0.422 & 0.386 \\\hline\end{array}$$

• A) $614,000
• B) $1,000,000
• C) $750,000
• D) $798,000

---

Definitions:

Negative Reinforcer

A stimulus whose removal following a behavior increases the likelihood that the behavior will occur again in the future.

Primary Reinforcers

Innate reinforcing qualities, such as food and water, that fulfill basic biological needs and do not require learning to be effective.

Variable-ratio Schedule

A reinforcement schedule in behavioral psychology where a response is rewarded after an unpredictable number of responses, enhancing motivation to respond.

Specified Number

A particular or exact number that has been identified or stated.