1) You are a factory owner who has just purchased a new machine for $5,000. Over the next year, it would have cost you $1,000 to rent this same machine. If the machine sells for $5,000 one year from now, what is the rate of return on this asset?
2) Continuing the setup from question 1, if a bank was to offer you an interest rate of .10 on your savings, would you be better off buying or renting?a)Buyingb)Renting
3) Again, same setup as questions 1 and 2. You buy a machine for $5,000 with an implicit rental rate of $1,000. The bank offers you an interest rate of .10 on your savings. After one year, how much money could you sell your machine for if the arbitrage condition is satisfied?
4) Do you consider yourself to be risk-averse, risk-neutral, or risk-loving? Suppose made you two offers. In the first, we would roll a fair die. If a 6 came up, I would give you $600. Otherwise, you would get nothing. In the second offer, I simply gave you $100. Which option would you prefer, and is that consistent with your risk preferences expressed above?