You Have Won the Lottery and Have Been Given the Choice

question 31

Multiple Choice

You have won the lottery and have been given the choice of receiving $5 million today or $10 million after 10 years. Assume that the interest rate remains fixed at 10% per year for the entire 10-year period. You should choose:

• A)$10 million after 10 years, since this is more than you would get if you invested $5 million for 10 years at an annual rate of interest of 10%.
• B)$10 million after 10 years, since that is a larger amount than the present value of $5 million paid after 10 years.
• C)$5 million today, since it would be worth more than $10 million after 10 years if the $5 million earned interest at the rate of 10% per year.
• D)$10 million after 10 years, since it is the larger amount.

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Definitions:

Average Product

The ratio of total product to the amount of input used, determined by dividing the overall output by the input quantity.

Average Product

The average amount of output produced per unit of a specific input, like labor or capital, over a certain period.

Diminishing Returns

The principle stating that if one factor of production is increased while others remain constant, the overall returns will initially increase but will eventually decrease after a certain point.