Question 1

Figure 5.2.3
-The individual pictured in Figure 5.2.3:

Accepted Answer

A)  prefers a sure $6000 to a 50% chance of $4000 and a 50% chance of $8000. 
B)  has an expected utility of 12 from a 50% chance of $4000 and a 50% chance of $8000. 
C)  would receive a utility of 12 from a sure $6000. 
D)  would receive a utility of 18 from a sure $6000. 
A)  prefers a sure $6000 to a 50% chance of $4000 and a 50% chance of $8000. 
B)  has an expected utility of 12 from a 50% chance of $4000 and a 50% chance of $8000. 
C)  would receive a utility of 12 from a sure $6000. 
D)  would receive a utility of 18 from a sure $6000.

Question 2

What would best explain why a generally risk-averse person would bet $100 during a night of blackjack in Las Vegas?

Accepted Answer

A)  Risk aversion relates to income choices only, not expenditure choices. 
B)  Risk-averse people may gamble under some circumstances. 
C)  The economics of gambling and the economics of income risk are two different things. 
D)  Risk-averse people attach high subjective probabilities to favorable outcomes, even when objective probabilities are known. 
A)  Risk aversion relates to income choices only, not expenditure choices. 
B)  Risk-averse people may gamble under some circumstances. 
C)  The economics of gambling and the economics of income risk are two different things. 
D)  Risk-averse people attach high subjective probabilities to favorable outcomes, even when objective probabilities are known.

Question 3

What is the advantage of the standard deviation over the average deviation?

Accepted Answer

A)  Because the standard deviation requires squaring of deviations before further computation, positive and negative deviations do not cancel out. 
B)  Because the standard deviation does not require squaring of deviations, it is easy to tell whether deviations are positive or negative. 
C)  The standard deviation removes the units from the calculation, and delivers a pure number. 
D)  The standard deviation expresses the average deviation in percentage terms, so that different choices can be more easily compared. 
E)  The standard deviation transforms subjective probabilities into objective ones so that calculations can be performed. 
A)  Because the standard deviation requires squaring of deviations before further computation, positive and negative deviations do not cancel out. 
B)  Because the standard deviation does not require squaring of deviations, it is easy to tell whether deviations are positive or negative. 
C)  The standard deviation removes the units from the calculation, and delivers a pure number. 
D)  The standard deviation expresses the average deviation in percentage terms, so that different choices can be more easily compared. 
E)  The standard deviation transforms subjective probabilities into objective ones so that calculations can be performed.

Question 4

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 5

Richard is a stock market day trader. His utility of wealth function is   Richard has seen a recent upward trend in the price of Yahoo stock. He feels that there is a 30% chance the stock will rise from $175 per share to $225. Otherwise, he believes the stock will settle to about $150 per share. Richard's current wealth is $1.75 million. Assume that if Richard purchases the stock, he will use his entire wealth. Given his risk preferences, will Richard buy Yahoo?

Accepted Answer

Richard will purchase the stock if his e

Question 6

Figure 5.2.1
-Refer to Figure 5.2.1 above. Because risk is undesirable, the greater the amount of risk, the greater the expected income needed to make the individual equally well off. Which of the two graphs best describes this assertion?

Accepted Answer

A)  The figure in panel (a) 
B)  The figure in panel (b) 
C)  Both figures 
D)  Neither figure 
A)  The figure in panel (a) 
B)  The figure in panel (b) 
C)  Both figures 
D)  Neither figure

Question 7

Table 5.4
  
-Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is:

Accepted Answer

A)  $1. 
B)  $10. 
C)  $40. 
D)  $50. 
E)  $60. 
A)  $1. 
B)  $10. 
C)  $40. 
D)  $50. 
E)  $60.

Question 8

Mary is a fervent Iowa State University Cyclone Basketball fan. She derives utility as a function of the ISU team winning the Big XII championship and from income according to the function   and w is her level of wealth. Mary believes the probability of a Cyclone championship is 1/4. Mary has been offered the following "insurance policy." The insurance policy costs $16. If the Cyclones win the championship, she pays only the policy cost of $16. If the Cyclones lose, she will receive $21.50 (so that after taking into account the policy cost of $16, her net return is $5.50). Will Mary's expected utility increase if she purchases the policy?

Accepted Answer

If Mary does not purchase the

Question 9

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 10

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 11

Smith just bought a house for $250,000. Earthquake insurance, which would pay $250,000 in the event of a major earthquake, is available for $25,000. Smith estimates that the probability of a major earthquake in the coming year is 10 percent, and that in the event of such a quake, the property would be worth nothing. The utility (U) that Smith gets from income (I) is given as follows: U(I) =   .
Should Smith buy the insurance?

Accepted Answer

A)  Yes 
B)  No 
C)  Smith is indifferent. 
D)  We need more information on Smith's attitude toward risk. 
A)  Yes 
B)  No 
C)  Smith is indifferent. 
D)  We need more information on Smith's attitude toward risk.

Question 12

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1
  
-Refer to Table 5.1. Expected income for the first year is:

Accepted Answer

A)  highest in accounting. 
B)  highest in mathematics. 
C)  higher in English than in mathematics. 
D)  higher in political science than in economics. 
E)  highest in economics. 
A)  highest in accounting. 
B)  highest in mathematics. 
C)  higher in English than in mathematics. 
D)  higher in political science than in economics. 
E)  highest in economics.

Question 13

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 14

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 15

The correlation between an asset's real rate of return and its risk (as measured by its standard deviation) is usually:

Accepted Answer

A)  positive. 
B)  strictly linear. 
C)  flat. 
D)  negative. 
E)  chaotic. 
A)  positive. 
B)  strictly linear. 
C)  flat. 
D)  negative. 
E)  chaotic.

Question 16

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 options in expected income order, highest 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 17

One reason individuals are willing to pay for information in uncertain situations is that information:

Accepted Answer

A)  can reduce uncertainty. 
B)  is a way to diversify. 
C)  is a method of insurance. 
D)  is a method of self-insurance. 
E)  always reduces the difference between the probabilities of possible outcomes. 
A)  can reduce uncertainty. 
B)  is a way to diversify. 
C)  is a method of insurance. 
D)  is a method of self-insurance. 
E)  always reduces the difference between the probabilities of possible outcomes.

Question 18

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs 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 19

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   Should Steve purchase the stock?

Accepted Answer

Steve's Expected utility from purchasing

Question 20

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face, but you could buy information that reduces the degree of uncertainty. Based on the discussion in this chapter, the value of this partial information could be determined as the:

Accepted Answer

A)  expected outcome under complete certainty minus the expected outcome under the partial information case. 
B)  expected outcome under the partially uncertain case minus the expected outcome under the completely uncertain case. 
C)  utility of the partially certain case minus the utility of the completely certain case. 
D)  We cannot determine the value of information under partial certainty. 
A)  expected outcome under complete certainty minus the expected outcome under the partial information case. 
B)  expected outcome under the partially uncertain case minus the expected outcome under the completely uncertain case. 
C)  utility of the partially certain case minus the utility of the completely certain case. 
D)  We cannot determine the value of information under partial certainty.

Figure 5.2.3 -The individual pictured in Figure 5.2.3:

What would best explain why a generally risk-averse person would bet $100 during a night of blackjack in Las Vegas?

What is the advantage of the standard deviation over the average deviation?

Figure 5.2.1 -Refer to Figure 5.2.1 above. Because risk is undesirable, the greater the amount of risk, the greater the expected income needed to make the individual equally well off. Which of the two graphs best describes this assertion?

Table 5.4 -Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is:

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:

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. Expected income for the first year is:

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:

The correlation between an asset's real rate of return and its risk (as measured by its standard deviation) is usually:

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 options in expected income order, highest first.

One reason individuals are willing to pay for information in uncertain situations is that information:

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face, but you could buy information that reduces the degree of uncertainty. Based on the discussion in this chapter, the value of this partial information could be determined as the:

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

Behavioral Economics

Filters

Exam 5: Uncertainty and Consumer Behavior

Figure 5.2.3 -The individual pictured in Figure 5.2.3:

What would best explain why a generally risk-averse person would bet $100 during a night of blackjack in Las Vegas?

What is the advantage of the standard deviation over the average deviation?

Figure 5.2.1 -Refer to Figure 5.2.1 above. Because risk is undesirable, the greater the amount of risk, the greater the expected income needed to make the individual equally well off. Which of the two graphs best describes this assertion?

Table 5.4 -Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is:

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:

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. Expected income for the first year is:

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:

The correlation between an asset's real rate of return and its risk (as measured by its standard deviation) is usually:

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 options in expected income order, highest first.

One reason individuals are willing to pay for information in uncertain situations is that information:

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face, but you could buy information that reduces the degree of uncertainty. Based on the discussion in this chapter, the value of this partial information could be determined as the:

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

Behavioral Economics

Filters