Chapter 1.3, Problem I.13E

You have recently won the super jackpot in the WashingtonState Lottery. On reading the fine print, you discover that you have the following twooptions:a. You will receive 31 annual payments of $250,000, with the first payment beingdelivered today. The income will be taxed at a rate of 28 percent. Taxes will bewithheld when the checks are issued.b. You will receive $530,000 now, and you will not have to pay taxes on this amount.In addition, beginning one year from today, you will receive $200,000 each yearfor 30 years. The cash flows from this annuity will be taxed at 28 percent.Using a discount rate of 7 percent, which option should you select?

Warren Buffy is an enormously wealthy investor who has built his fortune through his legendary busimen acumen. He currently has been offered three major investments and would like to choose one. The first one is a conservative  investment that would perform well in an improving economy and only suffer a small loss in a worsening economy.  The second is a speculative investment that would perform extremely well in an improving economy but would do  very badly in a worsening economy. The third is a countercyclical investment that would lose some money in an improving economy but would perform well in a worsening economy. The respective payoffs (millions) and the  associated probabilities as shown in the Table below.   Decision alternatives                  Improving                Stable       Worsening Conservative                 30.00                     5.00             -8.00 Speculative                   40.00                    10.50           -30.00 Countercyclical            -5.0…

Suppose that this particular study compared a large group of individuals who play squash regularly with those of an equal-sized group who get no exercise at all. Playing squash does provide a good cardiovascular workout. However, we also know that squash players tend to be affluent enough to belong to clubs with squash courts. Wealthy individuals may have great access to health care, which can also improve cardiovascular health. If our analysis is sloppy, we may attribute health benefits to playing squash when in fact the real benefit comes from being wealthy enough to play squash (in which case playing polo would also be associ ated with better heart health, even though the horse is doing most of the work). Or perhaps causality goes the other direction. Could having a healthy heart “cause” exercise? Yes. Individuals who are infirm, particularly those who have some incipient form of heart disease, will find it much harder to exercise. They will certainly be less likely to play squash…