Question 1

Individuals who fully insure their house and belongings against fire

Accepted Answer

A)  have wasted their money if a fire does not occur. 
B)  generally do so in order that their after-fire wealth can be equal to their before-fire wealth. 
C)  generally do so in order that their after-fire wealth can be higher than their before-fire wealth. 
D)  generally do so in order to guarantee that the worst outcome, a fire with no insurance, does not occur. 
E)  can never come out as well financially after a fire as they were before it. 
A)  have wasted their money if a fire does not occur. 
B)  generally do so in order that their after-fire wealth can be equal to their before-fire wealth. 
C)  generally do so in order that their after-fire wealth can be higher than their before-fire wealth. 
D)  generally do so in order to guarantee that the worst outcome, a fire with no insurance, does not occur. 
E)  can never come out as well financially after a fire as they were before it.

Question 2

Scenario 5.3:
Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance:
  
-Refer to Scenario 5.3. Where is the highest expected revenue, based on the 10 years' past performance?

Accepted Answer

A)  Whizbo 
B)  Yowzo 
C)  Zowiebo 
D)  Whizbo and Yowzo 
E)  Yowzo and Zowiebo 
A)  Whizbo 
B)  Yowzo 
C)  Zowiebo 
D)  Whizbo and Yowzo 
E)  Yowzo and Zowiebo

Question 3

Consider the following statements when answering this question;
I. Without fire insurance, the expected value of home ownership for a risk averse homeowner is $W. Insurance companies are willing to sell this homeowner a policy that guarantees the homeowner a wealth of $W.
II. In a neighborhood where the price of houses are identical, the probability of a fire is identical, and the value of damage done by fires is identical, the risk premium for an insurance policy that repays all the cost of the fire damage does not vary across homeowners.

Accepted Answer

A)  I and I are true. 
B)  I is true, and II is false. 
C)  I is false, and II is true. 
D)  I and II are false. 
A)  I and I are true. 
B)  I is true, and II is false. 
C)  I is false, and II is true. 
D)  I and II are false.

Question 4

Assume that one of two possible outcomes will follow a decision. One outcome yields a $75 payoff and has a probability of 0.3; the other outcome has a $125 payoff and has a probability of 0.7. In this case the expected value is

Accepted Answer

A)  $85. 
B)  $60. 
C)  $110. 
D)  $35. 
A)  $85. 
B)  $60. 
C)  $110. 
D)  $35.

Question 5

Which of the following assets is almost riskless?

Accepted Answer

A)  Common stocks 
B)  Long-term corporate bonds 
C)  U.S. Treasury bills 
D)  Long-term government bonds 
E)  Apartment buildings 
A)  Common stocks 
B)  Long-term corporate bonds 
C)  U.S. Treasury bills 
D)  Long-term government bonds 
E)  Apartment buildings

Question 6

Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and the remainder in Treasury bills, the expected return on her portfolio is:

Accepted Answer

A)  4 percent. 
B)  11.8 percent. 
C)  17 percent. 
D)  22.2 percent. 
E)  30 percent. 
A)  4 percent. 
B)  11.8 percent. 
C)  17 percent. 
D)  22.2 percent. 
E)  30 percent.

Question 7

The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

Accepted Answer

A)  Investors A and B will hold the same portfolio. 
B)  Investors A and B will have different portfolios of the same standard deviation. 
C)  Investors A and B will have different portfolios of the same rate of return. 
D)  Investors A and B will have different portfolios but have the same level of risk aversion. 
E)  Investor A will expect to earn a lower rate of return than investor B. 
A)  Investors A and B will hold the same portfolio. 
B)  Investors A and B will have different portfolios of the same standard deviation. 
C)  Investors A and B will have different portfolios of the same rate of return. 
D)  Investors A and B will have different portfolios but have the same level of risk aversion. 
E)  Investor A will expect to earn a lower rate of return than investor B.

Question 8

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3
  
-Refer to Table 5.3. Rank the doctor's job choices in order, least risky first.

Accepted Answer

A)  Work for HMO, open own practice, do research 
B)  Work for HMO, do research, open own practice 
C)  Do research, open own practice, work for HMO 
D)  Do research, work for HMO, open own practice 
E)  Open own practice, work for HMO, do research 
A)  Work for HMO, open own practice, do research 
B)  Work for HMO, do research, open own practice 
C)  Do research, open own practice, work for HMO 
D)  Do research, work for HMO, open own practice 
E)  Open own practice, work for HMO, do research

Question 9

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and pay-offs are given below:
   The expected value of the investment is $25. Although all the information is correct, information is missing.
-Refer to Scenario 5.4. What is the variance of the investment?

Accepted Answer

A)  -75 
B)  275 
C)  3,150 
D)  4,637.50 
E)  8,125 
A)  -75 
B)  275 
C)  3,150 
D)  4,637.50 
E)  8,125

Question 10

Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. Hillary's indifference curves showing her preferences toward risk and return can be shown in a diagram. Expected return is plotted on the vertical axis and standard deviation of return on the horizontal axis. Although her indifference curves are upward sloping and bowed downward, their slope is very gradual (they are almost horizontal). These indifference curves reveal that Hillary is:

Accepted Answer

A)  risk neutral. 
B)  risk averse. 
C)  risk loving. 
D)  irrational. 
A)  risk neutral. 
B)  risk averse. 
C)  risk loving. 
D)  irrational.

Question 11

Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. Hillary's indifference curves showing her preferences toward risk and return can be shown in a diagram. Expected return is plotted on the vertical axis and standard deviation of return on the horizontal axis. Although her indifference curves are upward sloping and bowed downward, their slope is very gradual (they are almost horizontal). With these indifference curves Hillary will invest:

Accepted Answer

A)  most of her savings in Treasury bills, and a small percentage in the real estate project. 
B)  all of her savings in Treasury bills. 
C)  half of her savings in Treasury bills and half in the real estate project. 
D)  most of her savings in the real estate project, and a small percentage in Treasury bills. 
A)  most of her savings in Treasury bills, and a small percentage in the real estate project. 
B)  all of her savings in Treasury bills. 
C)  half of her savings in Treasury bills and half in the real estate project. 
D)  most of her savings in the real estate project, and a small percentage in Treasury bills.

Question 12

Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and remainder in Treasury bills, the standard deviation of her portfolio is:

Accepted Answer

A)  0 percent. 
B)  12 percent. 
C)  28 percent. 
D)  30 percent. 
E)  40 percent. 
A)  0 percent. 
B)  12 percent. 
C)  28 percent. 
D)  30 percent. 
E)  40 percent.

Question 13

Connie's utility depends upon her income. Her utility function is U = I1/2. She has received a prize that depends on the roll of a pair of dice. If she rolls a 3, 4, 6 or 8, she will receive $400. Otherwise she will receive $100.
a. What is the expected payoff from this prize? [Hint: The probability of rolling a 3 is 1/18, the probability of rolling a 4 is 3/36, the probability of rolling a 6 is 5/36, and the probability of rolling an 8 is 5/36.]
b. What is the expected utility from this prize?
c. Connie is offered an alternate prize of $169 (no dice roll is required). Will she accept the alternate prize or roll the dice?
d. What is the minimum payment that Connie will accept to forego the roll of the dice?

Accepted Answer

Expected return on stock:
a.
The probabi

Question 14

In figure below, what is true about the two jobs?

Accepted Answer

A)  Job 1 has a larger standard deviation than Job 2. 
B)  All outcomes in both jobs have the same probability of occurrence. 
C)  A risk-averse person would prefer Job 2. 
D)  A risk-neutral person would prefer Job 1. 
E)  Job 1 has the same expected income as Job 2. 
A)  Job 1 has a larger standard deviation than Job 2. 
B)  All outcomes in both jobs have the same probability of occurrence. 
C)  A risk-averse person would prefer Job 2. 
D)  A risk-neutral person would prefer Job 1. 
E)  Job 1 has the same expected income as Job 2.

Question 15

Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows
Larry: UL(I) = 10   
.
Judy: UJ (I) = 3I2.
Carol: UC (I) = 20I.

Accepted Answer

Larry's marginal utility of income is @#IMG-DLM& .

Question 16

Upon graduation, you are offered three jobs.
 
Rank the three job offers in terms of expected income, from the highest to the lowest.

Accepted Answer

A)  Samsa Exterminators, Gradgrind Tech, Goblin Fruits 
B)  Samsa Exterminators, Goblin Fruits, Gradgrind Tech 
C)  Gradgrind Tech, Samsa Exterminators, Goblin Fruits 
D)  Gradgrind Tech, Goblin Fruits, Samsa Exterminators 
E)  Goblin Fruits, Samsa Exterminators, Gradgrind Tech 
A)  Samsa Exterminators, Gradgrind Tech, Goblin Fruits 
B)  Samsa Exterminators, Goblin Fruits, Gradgrind Tech 
C)  Gradgrind Tech, Samsa Exterminators, Goblin Fruits 
D)  Gradgrind Tech, Goblin Fruits, Samsa Exterminators 
E)  Goblin Fruits, Samsa Exterminators, Gradgrind Tech

Question 17

Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. Which of the following statements is true?

Accepted Answer

A)  The expected cost of not fixing the car is less than the cost of fixing it. 
B)  The expected cost of not fixing the car is greater than the cost of fixing it. 
C)  It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are subjective. 
D)  It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are not equal. 
A)  The expected cost of not fixing the car is less than the cost of fixing it. 
B)  The expected cost of not fixing the car is greater than the cost of fixing it. 
C)  It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are subjective. 
D)  It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are not equal.

Question 18

Scenario 5.3:
Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance:
  
-Refer to Scenario 5.3. The expected revenue from all three companies combined is

Accepted Answer

A)  $11 million 
B)  $17.9 million. 
C)  $25.5 million. 
D)  $29.5 million. 
E)  $48 million. 
A)  $11 million 
B)  $17.9 million. 
C)  $25.5 million. 
D)  $29.5 million. 
E)  $48 million.

Question 19

What form of irrational behavior can cause asset price bubbles?

Accepted Answer

A)  People do not based their investment decision on the fundamental value of the asset but only on the belief that the asset price will continue to increase. 
B)  People accidentally buy assets that they did not want, and this drives up the asset price. 
C)  Asset owners panic and begin to sell their assets as quickly as possible. 
D)  People throw darts at a list of stocks and buy whatever the dart lands on without thinking about the reasons. 
A)  People do not based their investment decision on the fundamental value of the asset but only on the belief that the asset price will continue to increase. 
B)  People accidentally buy assets that they did not want, and this drives up the asset price. 
C)  Asset owners panic and begin to sell their assets as quickly as possible. 
D)  People throw darts at a list of stocks and buy whatever the dart lands on without thinking about the reasons.

Question 20

Scenario 5.8:
Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table:
Planes Tourism Revenue Expected
Leased Light Heavy Profit
2 $90 million $30 million $60 million
3 $10 million $140 million $75 million
-Refer to Scenario 5.8. The value to Icarus Airlines of complete information is

Accepted Answer

A)  $40 million. 
B)  $90 million. 
C)  $115 million. 
D)  $120 million. 
E)  $125 million. 
A)  $40 million. 
B)  $90 million. 
C)  $115 million. 
D)  $120 million. 
E)  $125 million.

Individuals who fully insure their house and belongings against fire

Assume that one of two possible outcomes will follow a decision. One outcome yields a $75 payoff and has a probability of 0.3; the other outcome has a $125 payoff and has a probability of 0.7. In this case the expected value is

Which of the following assets is almost riskless?

The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3 -Refer to Table 5.3. Rank the doctor's job choices in order, least risky first.

In figure below, what is true about the two jobs?

Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows Larry: U_L(I) = 10 . Judy: U_J (I) = 3I². Carol: U_C (I) = 20I.

Upon graduation, you are offered three jobs. Rank the three job offers in terms of expected income, from the highest to the lowest.

What form of irrational behavior can cause asset price bubbles?

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Filters

Exam 5: Uncertainty and Consumer Behavior

Individuals who fully insure their house and belongings against fire

Assume that one of two possible outcomes will follow a decision. One outcome yields a $75 payoff and has a probability of 0.3; the other outcome has a $125 payoff and has a probability of 0.7. In this case the expected value is

Which of the following assets is almost riskless?

The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3 -Refer to Table 5.3. Rank the doctor's job choices in order, least risky first.

In figure below, what is true about the two jobs?

Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows Larry: UL(I) = 10 . Judy: UJ (I) = 3I2. Carol: UC (I) = 20I.

Upon graduation, you are offered three jobs. Rank the three job offers in terms of expected income, from the highest to the lowest.

What form of irrational behavior can cause asset price bubbles?

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Filters

Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows Larry: U_L(I) = 10 . Judy: U_J (I) = 3I². Carol: U_C (I) = 20I.