Suppose you have an option that gives you a lifetime income of $75,000 or a graduated income that begins at $30,000 and ends at $120,000 with the exact same present value. Which of the following would be true?
A. The second choice is generally preferred because the steadily improving income brings some pleasure.
B. Based on purely rational choice assumptions you should prefer the first choice.
C. There is no reason to believe either choice is preferred so you would be indifferent between the two options.
D. The first choice is preferred because no one likes low income years.
Answer: A
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Jimmy's utility of wealth schedule is given in the table above. Jimmy has a job with a one-third chance of earning $200 and a two-thirds chance of earnings $400. Jimmy's cost of risk is
A) $0. B) $16.67. C) $33.33. D) Jimmy's cost of risk cannot be determined without more information.
Sequential games provide the opportunity to use real options
Indicate whether the statement is true or false