Question 1

John Brown's utility of income function is U = log(I+1), where I represents income. From this information you can say that

Accepted Answer

A)  John Brown is risk neutral. 
B)  John Brown is risk loving. 
C)  John Brown is risk averse. 
D)  We need more information before we can determine John Brown's preference for risk. 
A)  John Brown is risk neutral. 
B)  John Brown is risk loving. 
C)  John Brown is risk averse. 
D)  We need more information before we can determine John Brown's preference for risk.

Question 2

Calculate the expected value of the following game. If you win the game, your wealth will increase by 100,000,000 times your wager. If you lose, you lose your wager amount.
The probability of winning is   
.

Accepted Answer

The expected value o

Question 3

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 probability of outcome B?

Accepted Answer

A)  0 
B)  -0.5 
C)  0.5 
D)  0.4 
E)  0.2 
A)  0 
B)  -0.5 
C)  0.5 
D)  0.4 
E)  0.2

Question 4

A farmer lives on a flat plain next to a river. In addition to the farm, which is worth $F, the farmer owns financial assets worth $A. The river bursts its banks and floods the plain with probability P, destroying the farm. If the farmer is risk averse, then the willingness to pay for flood insurance unambiguously falls when

Accepted Answer

A)  F is higher, and A is lower. 
B)  P is lower, and F is higher. 
C)  F & A are higher. 
D)  P is lower, and A is lower. 
E)  A is higher, and F is lower. 
A)  F is higher, and A is lower. 
B)  P is lower, and F is higher. 
C)  F & A are higher. 
D)  P is lower, and A is lower. 
E)  A is higher, and F is lower.

Question 5

Consider the following statements when answering this question;
I. The allocation of a risk averse investor's portfolio between a risk free asset and a risky asset never changes if the rate of return on both assets increases by the same amount.
II. Given the choice between investing in a risk free asset or a risky asset with higher expected returns, the utility maximizing portfolio of a risk neutral or risk loving investor would never include the risk free asset.

Accepted Answer

A)  I and II 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 II 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 6

To optimally deter crime, law enforcement authorities should:

Accepted Answer

A)  set higher fines for crimes that have a lower probability of being caught. 
B)  set the fine equal to the expected benefit, even if it is difficult to catch the offenders. 
C)  ignore the probabilities of catching offenders and attempt to prevent crime at all costs. 
D)  set very high fines regardless of the probability that an offender is caught. 
A)  set higher fines for crimes that have a lower probability of being caught. 
B)  set the fine equal to the expected benefit, even if it is difficult to catch the offenders. 
C)  ignore the probabilities of catching offenders and attempt to prevent crime at all costs. 
D)  set very high fines regardless of the probability that an offender is caught.

Question 7

Marsha owns a boat that is harbored on the east coast of the United States. Currently, there is a hurricane that is approaching her harbor. If the hurricane strikes her harbor, her wealth will be diminished by the value of her boat, as it will be destroyed. The value of her boat is $250,000. It would cost Marsha $15,000 to move the boat to a harbor out of the path of the hurricane. Marsha's utility of wealth function is U(w) =   
. Marsha's current wealth is $3 million including the value of the boat. Past evidence has influenced Marsha to believe that the hurricane will likely miss her harbor, and so she plans not to move her boat. Suppose the probability the hurricane will strike Marsha's harbor is 0.7. Calculate Marsha's expected utility given that she will not move her boat. Calculate Marsha's expected utility if she moves her boat. Which of the two options gives Marsha the highest expected utility?

Accepted Answer

If she will not move her boat, Marsha's

Question 8

A risk-averse individual prefers

Accepted Answer

A)  the utility of expected income of a risky gamble to the expected utility of income of the same risky gamble. 
B)  the expected utility of income of a risky gamble to the utility of expected income of the same risky gamble. 
C)  outcomes with 50-50 odds to those with more divergent probabilities, no matter what the dollar outcomes. 
D)  outcomes with higher probabilities assigned to more favorable outcomes, no matter what the outcomes are. 
E)  outcomes with highly divergent probabilities so that one of the outcomes is almost certain. 
A)  the utility of expected income of a risky gamble to the expected utility of income of the same risky gamble. 
B)  the expected utility of income of a risky gamble to the utility of expected income of the same risky gamble. 
C)  outcomes with 50-50 odds to those with more divergent probabilities, no matter what the dollar outcomes. 
D)  outcomes with higher probabilities assigned to more favorable outcomes, no matter what the outcomes are. 
E)  outcomes with highly divergent probabilities so that one of the outcomes is almost certain.

Question 9

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. The expected returns are highest for the physician who

Accepted Answer

A)  works for an HMO. 
B)  opens her own practice. 
C)  does research. 
D)  either opens her own practice or does research. 
E)  either works for an HMO or does research. 
A)  works for an HMO. 
B)  opens her own practice. 
C)  does research. 
D)  either opens her own practice or does research. 
E)  either works for an HMO or does research.

Question 10

Calculate the expected value of the following game. If you win the game, your wealth will increase by 36 times your wager. If you lose, you lose your wager amount. The probability of winning is 1/38 Calculate the variance of the game.

Accepted Answer

The expected value (EV) of the

Question 11

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.
  
-Refer to Scenario 5.6. The utility of expected income from research is

Accepted Answer

A)  U($275,000). 
B)  U($95,000). 
C)  [U($500,000) + U($50,000)]/2. 
D) .1U($500,000) + .9U($50,000). 
E)  dependent on which outcome actually occurs. 
A)  U($275,000). 
B)  U($95,000). 
C)  [U($500,000) + U($50,000)]/2. 
D) .1U($500,000) + .9U($50,000). 
E)  dependent on which outcome actually occurs.

Question 12

Scenario 5.2:
Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
-Refer to Scenario 5.2. Which of the following is true?

Accepted Answer

A)  Randy has a higher expected expense than Samantha for the car. 
B)  Randy has a lower expected expense than Samantha for the car. 
C)  Randy and Samantha have the same expected expense for the car, and it is somewhat less than $20,000. 
D)  Randy and Samantha have the same expected expense for the car: $20,000. 
E)  It is not possible to calculate the expected expense for the car until the true probabilities are known. 
A)  Randy has a higher expected expense than Samantha for the car. 
B)  Randy has a lower expected expense than Samantha for the car. 
C)  Randy and Samantha have the same expected expense for the car, and it is somewhat less than $20,000. 
D)  Randy and Samantha have the same expected expense for the car: $20,000. 
E)  It is not possible to calculate the expected expense for the car until the true probabilities are known.

Question 13

Table 5.4
  
-Refer to Table 5.4. If at Job B the $20 outcome occurs with probability .2, and the $50 outcome occurs with probability .8, then the standard deviation of payoffs at Job B is nearest which value?

Accepted Answer

A)  $10 
B)  $12 
C)  $20 
D)  $35 
E)  $44 
A)  $10 
B)  $12 
C)  $20 
D)  $35 
E)  $44

Question 14

Steve has received a stock tip from Monica. Monica has told him that XYZ Corp. will increase in value by 100%. Steve believes that Monica has a 25% chance of being correct. If Monica is incorrect, Steve expects the value of XYZ Corp. will fall by 50%. What is Steve's expected utility from buying $1,000 worth of XYZ Corp. stock? Steve's utility of income is U(I) = 50I. Should Steve purchase the stock?

Accepted Answer

Steve's Expected utility from purchasing

Question 15

The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the

Accepted Answer

A)  variance. 
B)  standard deviation. 
C)  expected value. 
D)  coefficient of variation. 
A)  variance. 
B)  standard deviation. 
C)  expected value. 
D)  coefficient of variation.

Question 16

The expected value is a measure of

Accepted Answer

A)  risk. 
B)  variability. 
C)  uncertainty. 
D)  central tendency. 
A)  risk. 
B)  variability. 
C)  uncertainty. 
D)  central tendency.

Question 17

What is an informational cascade?

Accepted Answer

A)  An excess flow of market information that makes it difficult for an investor to form a rational decision. 
B)  A continual decline in the quality of market information from public sources due to sequential budget cuts. 
C)  A continual increase in the quality of market information from public sources due to broader use of the internet by market participants. 
D)  A sequence of decisions based on the actions of others rather than fundamental information. 
A)  An excess flow of market information that makes it difficult for an investor to form a rational decision. 
B)  A continual decline in the quality of market information from public sources due to sequential budget cuts. 
C)  A continual increase in the quality of market information from public sources due to broader use of the internet by market participants. 
D)  A sequence of decisions based on the actions of others rather than fundamental information.

Question 18

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. In order to weigh which of the job choices is riskiest, an individual should look at

Accepted Answer

A)  the deviation, which is the difference between the probabilities of the two outcomes. 
B)  the deviation, which is the difference between the dollar amounts of the two outcomes. 
C)  the average deviation, which is found by averaging the dollar amounts of the two outcomes. 
D)  the standard deviation, which is the square root of the average squared deviation. 
E)  the standard deviation, which is the squared average square root of the deviation. 
A)  the deviation, which is the difference between the probabilities of the two outcomes. 
B)  the deviation, which is the difference between the dollar amounts of the two outcomes. 
C)  the average deviation, which is found by averaging the dollar amounts of the two outcomes. 
D)  the standard deviation, which is the square root of the average squared deviation. 
E)  the standard deviation, which is the squared average square root of the deviation.

Question 19

Which of the following actions may be explained by the law of small numbers?

Accepted Answer

A)  People buy lottery tickets. 
B)  People buy air travel insurance. 
C)  People purchase extended or long-term warranties or maintenance contracts for new automobiles and appliances. 
D)  all of the above 
A)  People buy lottery tickets. 
B)  People buy air travel insurance. 
C)  People purchase extended or long-term warranties or maintenance contracts for new automobiles and appliances. 
D)  all of the above

Question 20

Some high-end retail stores that distribute mail-order catalogs will prominently offer some very high priced goods for sale (for example, a luxury sports car with gold-plated interior trim) in addition to their regular line of merchandise. Behavioral economists argue that the stores do not really plan to sell these goods, but they use these items to provide the customers with a high reference point for the prices of the other goods in the catalog. This practice is an example of:

Accepted Answer

A)  the ultimatim game. 
B)  loss aversion. 
C)  anchoring. 
D)  none of the above 
A)  the ultimatim game. 
B)  loss aversion. 
C)  anchoring. 
D)  none of the above

John Brown's utility of income function is U = log(I+1), where I represents income. From this information you can say that

Calculate the expected value of the following game. If you win the game, your wealth will increase by 100,000,000 times your wager. If you lose, you lose your wager amount. The probability of winning is .

To optimally deter crime, law enforcement authorities should:

A risk-averse individual prefers

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. The expected returns are highest for the physician who

Calculate the expected value of the following game. If you win the game, your wealth will increase by 36 times your wager. If you lose, you lose your wager amount. The probability of winning is ¹/₃₈ Calculate the variance of the game.

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. -Refer to Scenario 5.6. The utility of expected income from research is

Scenario 5.2: Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. -Refer to Scenario 5.2. Which of the following is true?

Table 5.4 -Refer to Table 5.4. If at Job B the $20 outcome occurs with probability .2, and the $50 outcome occurs with probability .8, then the standard deviation of payoffs at Job B is nearest which value?

The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the

The expected value is a measure of

What is an informational cascade?

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. In order to weigh which of the job choices is riskiest, an individual should look at

Which of the following actions may be explained by the law of small numbers?

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

John Brown's utility of income function is U = log(I+1), where I represents income. From this information you can say that

Calculate the expected value of the following game. If you win the game, your wealth will increase by 100,000,000 times your wager. If you lose, you lose your wager amount. The probability of winning is .

To optimally deter crime, law enforcement authorities should:

A risk-averse individual prefers

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. The expected returns are highest for the physician who

Calculate the expected value of the following game. If you win the game, your wealth will increase by 36 times your wager. If you lose, you lose your wager amount. The probability of winning is 1/38 Calculate the variance of the game.

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. -Refer to Scenario 5.6. The utility of expected income from research is

Scenario 5.2: Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. -Refer to Scenario 5.2. Which of the following is true?

Table 5.4 -Refer to Table 5.4. If at Job B the $20 outcome occurs with probability .2, and the $50 outcome occurs with probability .8, then the standard deviation of payoffs at Job B is nearest which value?

The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the

The expected value is a measure of

What is an informational cascade?

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. In order to weigh which of the job choices is riskiest, an individual should look at

Which of the following actions may be explained by the law of small numbers?

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

Calculate the expected value of the following game. If you win the game, your wealth will increase by 36 times your wager. If you lose, you lose your wager amount. The probability of winning is ¹/₃₈ Calculate the variance of the game.