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Cornell University
Gregory Besharov
Economics 3330: Problem Set 2
Due September 15, 2008
1.
True/False/Explain
State whether each of the following is true or false and explain your answer.
Please limit your explanations
to no more than two sentences.
a.
Thinking of an annuity as the difference in two perpetuities, whether the annuity becomes more or less
valuable with an increase in the interest rate is indeterminate because both the perpetuity added in and
the one that is subtracted out both become smaller in magnitude (i.e., closer to zero).
b.
A project has positive net present value if and only if its internal rate of return is greater than the
company’s discount rate.
c.
According to Hyman Minsky’s “Financial Instability Hypothesis” article, “speculative finance” units
have insufficient cash flow to repay their interest or principal obligations so must sell assets or increase
their borrowing. (Article is available in Course Documents section of Blackboard site.)
2.
Powerball
The winner of the
Powerball
can choose whether to receive an annuity or a lumpsum payment.
Recently,
the Powerball was advertised as having a jackpot of $102m with a cash value of $52.1m.
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 Fall '08
 MBIEKOP
 Economics

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