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You do an experiment in which you offer participants $500 today or a different amount in the future. A participant tells you that they would be indifferent between receiving $750 4 years from now and $500 today. What is their (exponential) discount rate according to this experiment?
Discount Rate:
- It is the rate that computes the present worth of the cash flows in the future.
Information Provided:
- Term = 4 years
- Amount to be received = $750
- Present value = $500
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Solved in 3 steps
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- Corona virus has created health uncertainties. You could buy an health insurance for yourself against potential Corona viral infection by paying $ 24 every year or, you may buy a lifetime insurance for a onetime payment of $ 400 today. Using a discount rate of 5%, how many years does it take to make the lifetime subscription the better option compared to yearly payments?Use a financial calculator or computer software program to answer the following questions: a) Melanie is trying to save money for retirement and has a future goal of $750,000 at the end of 20 years. Determine the present value of her goal using a discount rate of 12%. b) How would the present value change if the $750,000 is to be received at the end of 15 years instead? Explain the impact and show your work?Kindly assist on questions below. (1) A person has wealth of $ 40000. If they have an accident they mush spend $ 30000 on car repairs. Their utility function is given by U = w1/2 where w is equal to their wealth . They do not get into an accident with 90% chance and they get into an accident with 10 % chance. What is the total fair premium for full insurance for this person. (2) Risk pooling can decrease risk if: a) Risks are independent b) risks are dependent c) enough people pool their risk d) if the amount if risk is small enough e) if people have different risk preferences
