1. The interest rate is 10% and will remain so forever. You do not drink wine but are interested in buying some for investment purposes. Assume that there are no transactions costs or storage costs and that a certain bottle of wine will be worth $44 one year from now, $51 two years from now, and $55 three years from now. After that it turns to worthless vinegar. How much should you be willing to pay for a bottle? (Pick the closest answer.) (B)

a.	$40
b.	$42.15
c.	$47.15
d.	$41.32
e.	$49.30

2. Bank 1 offers a deal on deposits of $1,000 or more. You must leave your money in the bank for three years, but bank 1 will pay you 8% interest for the first year, 8% interest for the second year, and 7% interest for the third year. In response, bank 2 offers a deal that it claims is even better. It also requires you to deposit at least $1,000 and to leave it in the bank for three years, but it will pay 12% interest in the first year and then 8% in the second and third year. After three years, you can take your money out of either bank and do what you want with it. Both banks compound interest annually. (D)

a.	The offer of bank 2 becomes relatively more attractive as the size of your initial deposit is larger.
b.	Bank 2 offers a better deal than bank 1.
c.	Bank 1 offers a better deal than bank 2.
d.	The two offers are equally valuable.
e.	None of the above.

3. Ashley, from your workbook, has discovered another wine, wine D. Wine drinkers are willing to pay 40 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 20 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.) (A)

a.	93 dollars
b.	40 dollars
c.	200 dollars
d.	440 dollars
e.	71 dollars

4. Shiverss annual fuel bill for home heating is 800 dollars per year. He considers three alternative plans for insulating his house. Plan A would reduce his annual fuel bill by 15%, plan B would reduce it by 20%, and plan C would eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 800 dollars, plan B would cost him 1,100, dollars, and plan C would cost him 8,800 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers? (B)

a.	Plan A.
b.	Plan B.
c.	Plan C.
d.	Plans A and B are equally good.
e.	He is best off using none of the plans.

The answers put at the end of questions. Please explain why.