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marysya [2.9K]
3 years ago
6

You are the beneficiary of a life insurance policy. the insurance company offers two options for receiving the proceeds: a lump

sum of $50,000 today or payments of $550 a month for ten years. if you can earn 6 percent, compounded monthly, which option should you take and why?
Business
1 answer:
r-ruslan [8.4K]3 years ago
8 0
Take the $550 per month for monthly income as after ten years it would reach the same amount just in a longer period of time
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Answer:

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Ken will maximize utility where the following equation holds:

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Where;

MU of Sprite = Marginal utility of Sprite = 3

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From the table in the question, equation (1) holds at the point where Marginal utility of potato chips is 6 since the Potato chips cost $2 per bag.

Substituting the values into equation (1), we have:

MU of Sprite / Price of Sprite = MU of potato chips / Price of potato chips => 3 / 1 = 6 / 2 = 3

Since when the marginal utility of potato chips that maximizes utility is 6, Ken consumes 4 Bags of Potato chips monthly and pays $2 per bag at this point, the amount he spends on potato chips each month can be calculated as follows:

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