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RealWorldGraduation_Question_77_Small_Expenses   <– PDF

A certain man has a full-time job. Every work day (Monday through Friday), he spends an average of $7.00 for lunch.  His wife has offered to make him a lunch every day (which would cost about $2.00 per day).  Suppose the man took his wife up on her offer, and invested the $5.00 per day in mutual funds that received an average annual return of 8%.  Will saving these small amounts make any economic difference over the long run, say 20 or 30 years?  To assess this question, the formula for calculating the value of an investment with a fixed annual return is (neglecting inflation):

A = P(1.0 + r)ⁿ,

where P is the amount invested, r is the rate of return expressed as a decimal (8% = 0.08), n is the number of years the money is invested, and A is the value of the investment after n years.   In this case, P would be the amount saved in a year.  Inflation is ignored here because we are interested in the buying power, not the number of dollars.  (Including inflation makes the calculation more difficult, and increases the number of dollars the investment is worth, but those dollars have less buying power).  The effect of inflation does not change the general answer to this question.

a) It is not worth it because “brown-bagging” is not cool, especially if one is a white-collar worker. In our image-conscious society, people think “brown-bagging” is a sign of cheapness, and appearing cheap may impede one’s chances of getting ahead.

b) “Brown-bagging” over long periods of time is bad for the environment because several trees will probably have to be sacrificed to manufacture the bags, so it is not worthwhile.

c) It may be worthwhile for short periods when money is tight, or if one’s workplace is far away from restaurants, but is otherwise socially degrading.

d) It is not worth it; the amount accumulated will be so small that he would have been better off to enjoy buying his lunch every day.

e) It is not worth it in general, for a combination of the above reasons, and possibly some others.

(The answer is on p. 2 of the PDF.)

RealWorldGraduation_Question_76_Realtors  <– PDF

When buying a house, many people use the services of realtors, who are licensed specialists in handling real-estate transactions. Usually they operate in “territories”, and acquire an extensive knowledge of the neighborhoods and school systems.  Normally they will assist the buyers in helping them get around, and “showing” the houses for sale. Their fee for this service is normally 7% of the selling price of the house, which is paid by the seller out of the proceeds of the sale.  What are the benefits of using a realtor if you are buying a house?

a) The realtor provides protection for the buyer against unscrupulous sellers, since they work directly with and therefore, have a vested interest in satisfying the buyer.

b) The services rendered by the realtor are paid by the seller, so whatever the realtor does is ultimately free to the buyer.

c) The realtor can provide legal advice on the complexities of real-estate law and regulations governing these transactions.

d) Since the realtors are licensed, the buyer can be confident that every property listed for sale is listed accurately with regard to age, conditions, known defects, and any existing liens against the property.

e) All of the above.

(The answer is on p. 2 of the PDF.)