Suppose you win a raffle held at a neighborhood elementary school fundraiser and are given the choice between two different ways to be paid. You can either accept the money in a lump sum immediately or in a series of payments over time. If you choose the lump sum payout, you receive $3,000 today. If you choose to collect payments over time, you receive three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today. At an interest rate of 5% per year, the winner would be better off accepting the value. since that choice has the greater present At an interest rate of 10% per year, the winner would be better off accepting A couple years after you win the raffle, you and your friend are back at the same event. This time, your friend gets lucky and wins the contest, and you both realize the payout schemes are the same as they were back when you won. They now face the decision between collecting their prize as a lump sum or as a series of payments over time. Based on your experience, which piece of advice will be most helpful to your friend? O The lump sum is always better. The payments over time are always better. OIt will depend on the interest rate; advise her to get a calculator. O None of these answers is good advice. since it has the greater present value.
Suppose you win a raffle held at a neighborhood elementary school fundraiser and are given the choice between two different ways to be paid. You can either accept the money in a lump sum immediately or in a series of payments over time. If you choose the lump sum payout, you receive $3,000 today. If you choose to collect payments over time, you receive three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today. At an interest rate of 5% per year, the winner would be better off accepting the value. since that choice has the greater present At an interest rate of 10% per year, the winner would be better off accepting A couple years after you win the raffle, you and your friend are back at the same event. This time, your friend gets lucky and wins the contest, and you both realize the payout schemes are the same as they were back when you won. They now face the decision between collecting their prize as a lump sum or as a series of payments over time. Based on your experience, which piece of advice will be most helpful to your friend? O The lump sum is always better. The payments over time are always better. OIt will depend on the interest rate; advise her to get a calculator. O None of these answers is good advice. since it has the greater present value.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. Which lottery payout scheme is better?
Suppose you win a raffle held at a neighborhood elementary school fundraiser and are given the choice between two different ways to be paid. You
can either accept the money in a lump sum immediately or in a series of payments over time. If you choose the lump sum payout, you receive $3,000
today. If you choose to collect payments over time, you receive three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from
today
At an interest rate of 6% per year, the winner would be better off accepting the
value.
since that choice has the greater present
At an interest rate of 10% per year, the winner would be better off accepting
A couple years after you win the raffle, you and your friend are back at the same event. This time, your friend gets lucky and wins the contest, and
you both realize the payout schemes are the same as they were back when you won. They now face the decision between collecting their prize as a
lump sum or as a series of payments over time. Based on your experience, which piece of advice will be most helpful to your friend?
The lump sum is always better.
O The payments over time are always better.
O It will depend on the interest rate; advise her to get a calculator.
None of these answers is good advice.
since it has the greater present value.
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