QR 26: CHOICE AND CHANCE

Assignment #1: Time, Trade-Offs, and Interest Rates

 

 

 

  1. Read through Chapter 3 in Making Hard Decisions (MHD) and through Chapter 6 in Smart Choices (SC). (Skimming Chapter 3 of MHD is sufficient for now.)
  2. Locate a copy of Microsoft Excel on a lab or personal computer, and learn how to set up a simple spreadsheet. Excel may be quite useful for the interest calculations in the problems that follow. Help with this will be available through the section leaders, too.
  3. From MHD, write up problems 2.10, 2.11, 2.12, 3.24, and either 3.18ab or 3.19. E-mail for help if you get stuck. Remember that you are encouraged to form study groups and consult with one another, but you should write up your own treatments and explanations of each problem to hand in. As with any academic work, be sure to cite your sources.
  4. Bring notes to class Tuesday preparing you to discuss the following (again you are welcome to work on this in groups, for example at the end of your section meetings):
  1. Exercises 3.18ab or 3.19 from this week's Problem Set.
  2. The "Value of Patience" Case at the end of Chapter 2 in MHD. Be ready to answer the questions there, to role play a bit, to defend your opinions with numbers, and to critique the use of all these numbers.
  3. Compare and contrast the approach in MHD with SC. In particular, how does the treatment of trade-offs in SC relate to all those Net Present Value (NPV) calculations in MHD? What assumptions about preferences, trade-offs, and time underlie the use of NPV in making business or personal decisions? Can you think of situations in which NPV would seem like a particularly inappropriate way of measuring how much future gains are worth to you now? Can you suggest alternative methods?
  1. Mathematical Puzzler (you may, but need not, post or hand in your thoughts): What is the net present value of an income stream consisting of $1000 delivered every year forever? Formally, this NPV is the sum of infinitely many positive numbers. Is the sum finite or infinite? Why? Are there practical lessons you can draw about the value of the future? (Hint: think geometrically.)