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Chapter 11 Test Bank KEY
1. Benefits today cannot be directly compared with costs in the future because:
2. The value of money changes over time because:
3. In order to compare benefits today with future costs, we need to know:
4. Which of the following decisions are complicated by the value of money changing over time?
5. Rational people having preferences for immediate benefits and delayed costs is another way of saying
that:
6. The interest rate:
7. The interest rate you typically earn on a deposit at a bank:
8. Different banks:
9. When people are deciding whether to deposit money in a bank:
10. Value of a loan amount X with interest r after one period equals:
11. The value of a loan of $2,000 after a year at 2 percent interest is:
12. The value of a loan of $500 after a year at 3 percent interest is:
13. The value of a loan of $100,000 after a year at 5 percent interest is:
14. The value of a loan of $50,000 after a year at 2 percent interest is:
15. The amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent is:
16. The amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent is:
17. The amount of interest owed on a loan of $100,000 after a year at an interest rate of 3 percent is:
18. The amount of interest owed on a loan of $75,000 after a year at an interest rate of 1 percent is:
19. You can also think of interest as:
20. Compounding is:
21. The process of accumulation that occurs when interest is paid on previously earned interest is called:
22. The future value of a deposit is:
23. Which of the following is closest to the future value of a $100 deposit earning 5 percent interest
annually after 5 years?
24. Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest
annually after 10 years?
25. Which of the following is closest to the future value of a $40,000 deposit earning 3 percent interest
annually after 5 years?
26. Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest
annually after 20 years?
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27. Compounding:
28. Present value is:
29. If you knew that an investment was going to pay you $215,892.50 in 10 years, and you knew that the
annual interest rate over that time would be 8 percent, you could calculate the present value to be:
30. If you knew that an investment was going to pay you $1,188,757 in 20 years, and you knew that the
annual interest rate over that time would be 2 percent, you could calculate the present value to be:
31. If you knew that an investment was going to pay you $46,370 in 5 years, and you knew that the
annual interest rate over that time would be 3 percent, you could calculate the present value to be:
32. If you knew that an investment was going to pay you $128 in 5 years, and you knew that the annual
interest rate over that time would be 5 percent, you could calculate the present value to be:
33. To compute the present value of a future value, you must know the _________ and the _________.
34. Knowing how to translate between present and future value can be useful when:
35. Present value:
36. The present value of $500,000 in 4 years at 7 percent interest is approximately:
37. The present value of $300,000 in 12 years at 4 percent interest is approximately:
38. The present value of $250,000 in 10 years at 2 percent interest is approximately:
39. If you want to own $1 million when you retire in 45 years, how much should you put into your
retirement fund now, given the interest rate is 3 percent?
40. Risk is:
41. Evaluating risk requires that:
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42. Expected value is:
43. Calculating expected value involves:
44. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. What is the probability of drawing
a blue marble in the first game?
45. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. What is the probability of drawing
a red marble in each game?
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46. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. What is the expected value of the
payoff in the first game?
47. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. Jack is considering whether to
play the first game. If Jack only cares about the expected value of the outcome and does not care about
risk, he should:
48. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. Kate is considering whether to
play the second game. If Kate only cares about the expected value of the outcome and does not care
about risk, she should:
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49. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. Kate decides to play the second
game. Her probability of pulling out a green marble is:
50. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. Kate decides to play the second
game. Kate’s expected value of payoff is:
51. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. Jack decides to play the first
game, and Kate decides to play the second game as described in the scenario. The expected value of the
payoff:
52. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. The expected value of the payoff
is _____ for the first game and _____ for the second game.
53. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. If Jack only cares about expected
value, and not risk, he should decide to play a game if:
54. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has
a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if
it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1
red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue,
they win $5; and if it is green, they win $1. Both games cost $5 to play. Assume Jack will play the games
that have a higher expected payoff than the cost of playing the game. Comparing the expected value of
the payoff of each game to the price of $5 to play, we can conclude that Jack should:
55. John is trying to decide whether to expand his business or not. If he continues his business as it is,
with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will
earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent
chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to
expand. The expected value of John’s earnings if he chooses not to expand is:
56. John is trying to decide whether to expand his business or not. If he continues his business as it is,
with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will
earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent
chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to
expand. The expected value of John’s earnings if he chooses to expand is:
57. John is trying to decide whether to expand his business or not. If he continues his business as it is,
with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will
earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent
chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to
expand. To make the best decision, John should compare:
58. John is trying to decide whether to expand his business or not. If he continues his business as it is,
with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will
earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent
chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to
expand. If John decides to expand based on expected value, it means that:
59. John is trying to decide whether to expand his business or not. If he continues his business as it is,
with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will
earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent
chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to
expand. John should: