Why God Created Evil

In class the other day we were talking about why God even created evil. If he is so powerful, why would he create evil when he could just create a nice, perfect little world? I think that He created evil to empower us. This ability to be good or evil gives us a power to choose our own lives. By doing this instead of determining that we will all be good, God gives us a sort of trust. Then, I believe, God hopes that the desire to be evil will eventually fade away in people and they will realize that they still have the ability to convert back to good. This fits in perfectly with the ideas of salvation and forgiveness. If God determined us to always be good, I don't think that people would be happy with the idea that they don't have a choice to live their life. But how would that work anyways? If we were created to always be good then would it be possible for us to resent it? It seems like it would work out, for God at least, if he determined our lives to be good. So did he mess up? Or did he just think it would be more fair for us if he gave us the option to decide how we want to act? It just seems like a whole lot of questions can be asked of God, and frankly, the whole "God works in mysterious ways" excuse isn't cutting it.