If you did not read this earlier post, read it now! We will be discussing the questions posted there. For the first question, if you were paid 1 million dollars a day for 31 days, you would have 31 million dollars. If you were to earn a dollar a day, doubling every day, you would end up having 1+2+4+...+1,073,741,824=2^31-1=2,147,483,647 or 2.1 billion dollars (see wiki.answers.com if you have trouble with the math). When you allow your efforts to multiply rather than add, you will always be better off since you are taking advantage of compound interest.
For the second question, you have to know about opportunity cost. If you chose Option A, you would have $1000 left in your pocket. If you could double that $1000 over 20 years, you would be better off than Option B. Imagine if you didn't know this! Someone could sell you a contract where you would happily take Option B. Little would you know that the other side was happily making money off of you. In fact this happens all the time and has many different forms.
Did you answer these questions correctly?
This post was reposted from http://finlit.biz/retirement-2/answers-to-the-2-basic-financial-questions-you-need-to-know/, originally written on January 25th, 2013.
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