Question 6 Lottery winners who take the lump sum payouts instead of payments spread out over many years: Obelieve the rate of return they could find in other financial assets is less than that implied in the extended payout. Osacrifice free money and are making an economically irrational decision. Oprefers immediate to delayed returns. Oare only making a rational economic decision if there is rapid inflation. 1 point
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Step 1: Lottery winners who take the lump sum payouts instead of payments spread out over many years are making a rational economic decision if there is rapid inflation. Show more…
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Which lottery payout scheme is better? Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum, you get $2,950 today. If you pick payments over time, you get three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today. At an interest rate of 8% per year, the winner would be better off accepting the , since that choice has the greater present value. At an interest rate of 10% per year, the winner would be better off accepting , since it has the greater present value. Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under the lump sum or the payments over time. What is the best advice to give your friend? The lump sum is always better. The payments over time are always better. It will depend on the interest rate; advise her to get a calculator. None of these answers is good advice.
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5. A lottery offers two options for a prize (7 marks) a. Which option would the winner choose if you expect to live for another: o 20 years? o 50 years? b. Use technology to determine the range of life expectancies when each option is preferred. Show your work. c. Write a brief reflection about which option you would choose, and why. Option A: $1 000 a week for life. Option B: $1 000 000 in one lump sum. If you choose Option B, you have the opportunity to place the winnings into an investment that also makes regular payments, at a rate of 3%/a, compounded weekly. The annuity will pay out a specific amount weekly based on how long you want the annuity to last.
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