Advanced MathEasy–MediumInterpreting the base of an exponential model
Advanced Math practice question
The value of an investment n years after it is made is modelled by V(n) = 1,000(1.05)ⁿ dollars. What is the best interpretation of the number 1.05 in this context?
- A. Each year, the value is 5% greater than the value the year before.Correct
- B. The value increases by $1.05 each year.
- C. The investment was worth $1.05 at the start.
- D. The value is multiplied by 105 each year.
Answer: A. Each year, the value is 5% greater than the value the year before.
Multiplying by 1.05 each year adds 5% of the current value.
Why the other answers are wrong
- B. The value increases by $1.05 each year.
- The growth is a percentage, not a fixed dollar amount.
- C. The investment was worth $1.05 at the start.
- The starting value is 1,000.
- D. The value is multiplied by 105 each year.
- 1.05 is a factor of 1.05, not 105.
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