Question 1

Upon graduation,you are offered three jobs.   Which of the following is true?

Accepted Answer

A) If you're risk-neutral,you go work for Goblin Fruits. 
B) If you're risk-loving,you go work for Goblin Fruits. 
C) If you're risk-neutral,you go work for Samsa Exterminators. 
D) If you're risk-neutral,you go work for Gradgrind Tech. 
A) If you're risk-neutral,you go work for Goblin Fruits. 
B) If you're risk-loving,you go work for Goblin Fruits. 
C) If you're risk-neutral,you go work for Samsa Exterminators. 
D) If you're risk-neutral,you go work for Gradgrind Tech.

Question 2

George Steinbrenner,the owner of the New York Yankees,has a utility function of wins in a season given by U(w)=   w2.Mr.Steinbrenner has been offered a trade.He believes if he completes the trade,his probability of winning 125 games is 15%.There is also an 85% chance the team won't gel and the Yankees will win only 90 games.Without the trade,Mr.Steinbrenner believes the Yankees will win 94 games.Given Mr.Steinbrenner's risk attitude,will he complete the trade?

Accepted Answer

Mr.Steinbrenner's expected utility from

Question 3

The difference between the utility of expected income and expected utility from income is

Accepted Answer

A) zero because income generates utility. 
B) positive because if utility from income is uncertain,it is worth less. 
C) negative because if income is uncertain,it is worth less. 
D) that expected utility from income is calculated by summing the utilities of possible incomes,weighted by their probability of occurring,and the utility of expected income is calculated by summing the possible incomes,weighted by their probability of occurring,and finding the utility of that figure. 
E) that the utility of expected income is calculated by summing the utilities of possible incomes,weighted by their probability of occurring,and the expected utility of income is calculated by summing the possible incomes,weighted by their probability of occurring,and finding the utility of that figure. 
A) zero because income generates utility. 
B) positive because if utility from income is uncertain,it is worth less. 
C) negative because if income is uncertain,it is worth less. 
D) that expected utility from income is calculated by summing the utilities of possible incomes,weighted by their probability of occurring,and the utility of expected income is calculated by summing the possible incomes,weighted by their probability of occurring,and finding the utility of that figure. 
E) that the utility of expected income is calculated by summing the utilities of possible incomes,weighted by their probability of occurring,and the expected utility of income is calculated by summing the possible incomes,weighted by their probability of occurring,and finding the utility of that figure.

Question 4

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 5

Suppose your instructor gave hats with your school's logo to half of your economics classmates.She then asked these students to value the hats,and the average response was $9 per hat.Under the endowment effect,we should expect that the average value assigned by the economics students who did NOT receive the hats to be:

Accepted Answer

A) higher. 
B) lower. 
C) the same. 
D) We cannot answer this question without knowing more about the risk preferences of the students. 
A) higher. 
B) lower. 
C) the same. 
D) We cannot answer this question without knowing more about the risk preferences of the students.

Question 6

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass.The variance of this investment opportunity:

Accepted Answer

A) is 0. 
B) is 1. 
C) is 2. 
D) is -1. 
E) cannot be determined without knowing the probabilities of each of the outcomes. 
A) is 0. 
B) is 1. 
C) is 2. 
D) is -1. 
E) cannot be determined without knowing the probabilities of each of the outcomes.

Question 7

Consider two upward sloping income-utility curves with income on the horizontal axis.The steeper curve represents risk preferences that are more:

Accepted Answer

A) risk averse. 
B) risk loving. 
C) loss averting. 
D) We cannot answer this question without more information about the shapes of the curves. 
A) risk averse. 
B) risk loving. 
C) loss averting. 
D) We cannot answer this question without more information about the shapes of the curves.

Question 8

The relationship between income and total utility for three investors (A,B,and
C)is shown in the tables below.
A B C
Income TU Income TU Income TU
5,000 14 5,000 4 5,000 6
10,000 24 10,000 8 10,000 14
15,000 32 15,000 12 15,000 24
20,000 38 20,000 16 20,000 36
25,000 43 25,000 20 25,000 52
30,000 47 30,000 24 30,000 72
35,000 49 35,000 28 35,000 100
Each investor has been confronted with the following three investment opportunities.The first opportunity is an investment which pays $15,000 risk free.Opportunity two offers a 0.4 probability of a $25,000 payment and a 0.6 probability of paying $10,000.The final investment will either pay $35,000 with a probability of 0.25 or $5,000 with a probability of 0.75.Determine the alternative each of the above investors would choose.Provide an intuitive explanation for the differences in their choices.

Accepted Answer

Investment 1 15,000 risk free Investment

Question 9

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 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 (

Question 11

Figure 5.3
-The individual pictured in Figure 5.3

Accepted Answer

A) would pay a risk premium of 2 utils to avoid facing the two outcomes. 
B) would want to be paid a risk premium of 2 utils to give up the opportunity of facing the two outcomes. 
C) would pay a risk premium of $1000 to avoid facing the two outcomes. 
D) would want to be paid a risk premium of $1000 to give up the opportunity of facing the two outcomes. 
E) has a risk premium of 2 utils. 
A) would pay a risk premium of 2 utils to avoid facing the two outcomes. 
B) would want to be paid a risk premium of 2 utils to give up the opportunity of facing the two outcomes. 
C) would pay a risk premium of $1000 to avoid facing the two outcomes. 
D) would want to be paid a risk premium of $1000 to give up the opportunity of facing the two outcomes. 
E) has a risk premium of 2 utils.

Question 12

Scenario 5.7:
As president and CEO of MegaWorld industries,Natasha must decide on some very risky alternative investments.Consider the following:  
-Refer to Scenario 5.7.As a risk-neutral executive,Natasha

Accepted Answer

A) is indifferent between projects D and E. 
B) prefers project E to project D,but do not necessarily consider E the best. 
C) prefers project E to all other projects. 
D) seeks the highest "profit if successful" of all the projects. 
E) seeks the project with the most even odds. 
A) is indifferent between projects D and E. 
B) prefers project E to project D,but do not necessarily consider E the best. 
C) prefers project E to all other projects. 
D) seeks the highest "profit if successful" of all the projects. 
E) seeks the project with the most even odds.

Question 13

The law of small numbers describes:

Accepted Answer

A) the tendency for people to overstate the probability associated with rare events. 
B) the ability to correctly estimate the expected outcome from a small number of events. 
C) the higher probability that small numbers (like 1,2,and 3)occur in random samples relative to large number (like 8 or 9). 
D) the improved accuracy of averages to estimate relatively small numbers (on the order of 1 or 10)than relatively large numbers (on the order of 1,000 or 10,000). 
A) the tendency for people to overstate the probability associated with rare events. 
B) the ability to correctly estimate the expected outcome from a small number of events. 
C) the higher probability that small numbers (like 1,2,and 3)occur in random samples relative to large number (like 8 or 9). 
D) the improved accuracy of averages to estimate relatively small numbers (on the order of 1 or 10)than relatively large numbers (on the order of 1,000 or 10,000).

Question 14

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 15

This year,on advice from your sister,you bought tobacco company stock at $50/share.During the year,you collected an $8 dividend,but due to the company's losses in medical lawsuits its stock fell to $40/share.At this point,you sell,realizing a

Accepted Answer

A) dividend yield of -16% and a capital loss of 20%. 
B) dividend yield of 16% and a capital loss of 20%. 
C) dividend loss 10%. 
D) capital loss of 10%. 
E) total loss of 20%. 
A) dividend yield of -16% and a capital loss of 20%. 
B) dividend yield of 16% and a capital loss of 20%. 
C) dividend loss 10%. 
D) capital loss of 10%. 
E) total loss of 20%.

Question 16

Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory?

Accepted Answer

A) People are less likely to leave tips at restaurants that they are unlikely to visit again. 
B) Waiters and waitresses have an incentive to provide good service in order to earn tips. 
C) Due to the convention of tipping,restaurants pay a lower wage to waiters and waitresses than they would in the absence of any tipping rule. 
D) Although tipping reduces the amount of income available for purchasing goods,people usually leave tips at restaurants. 
E) none of the above 
A) People are less likely to leave tips at restaurants that they are unlikely to visit again. 
B) Waiters and waitresses have an incentive to provide good service in order to earn tips. 
C) Due to the convention of tipping,restaurants pay a lower wage to waiters and waitresses than they would in the absence of any tipping rule. 
D) Although tipping reduces the amount of income available for purchasing goods,people usually leave tips at restaurants. 
E) none of the above

Question 17

Last year,on advice from your sister,you bought stock in Burpsy Soda at $100/share.During the year,you collected a $2 dividend and then sold the stock for $120/share.You experienced a

Accepted Answer

A) dividend yield of 9%. 
B) dividend yield of 20%. 
C) dividend yield of 11%. 
D) total return of 20%. 
E) total return of 22%. 
A) dividend yield of 9%. 
B) dividend yield of 20%. 
C) dividend yield of 11%. 
D) total return of 20%. 
E) total return of 22%.

Question 18

The slope of the budget line,faced by an investor deciding what percentage of her portfolio to place in a risky asset,increases when the

Accepted Answer

A) standard deviation of the portfolio gets smaller. 
B) standard deviation of the risky asset gets larger. 
C) rate of return on the risk-free asset gets larger. 
D) rate of return on the risky asset gets larger. 
E) rate of return on money gets larger. 
A) standard deviation of the portfolio gets smaller. 
B) standard deviation of the risky asset gets larger. 
C) rate of return on the risk-free asset gets larger. 
D) rate of return on the risky asset gets larger. 
E) rate of return on money gets larger.

Question 19

An investment opportunity has two possible outcomes.The expected value of the investment opportunity is $250.One outcome yields a $100 payoff and has a probability of 0.25.What is the payoff of the other outcome?

Accepted Answer

A) -$400 
B) $0 
C) $150 
D) $300 
E) none of the above 
A) -$400 
B) $0 
C) $150 
D) $300 
E) none of the above

Question 20

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

Upon graduation,you are offered three jobs. Which of the following is true?

The difference between the utility of expected income and expected utility from income is

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass.The variance of this investment opportunity:

Consider two upward sloping income-utility curves with income on the horizontal axis.The steeper curve represents risk preferences that are more:

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?

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.

Figure 5.3 -The individual pictured in Figure 5.3

Scenario 5.7: As president and CEO of MegaWorld industries,Natasha must decide on some very risky alternative investments.Consider the following: -Refer to Scenario 5.7.As a risk-neutral executive,Natasha

The law of small numbers describes:

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

This year,on advice from your sister,you bought tobacco company stock at $50/share.During the year,you collected an $8 dividend,but due to the company's losses in medical lawsuits its stock fell to $40/share.At this point,you sell,realizing a

Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory?

Last year,on advice from your sister,you bought stock in Burpsy Soda at $100/share.During the year,you collected a $2 dividend and then sold the stock for $120/share.You experienced a

The slope of the budget line,faced by an investor deciding what percentage of her portfolio to place in a risky asset,increases when the

An investment opportunity has two possible outcomes.The expected value of the investment opportunity is $250.One outcome yields a $100 payoff and has a probability of 0.25.What is the payoff of the other outcome?

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 1-83

Markets With Asymmetric Information

Externalities and Public Goods

Filters

Exam 5: Uncertainty and Consumer Behavior

Upon graduation,you are offered three jobs. Which of the following is true?

The difference between the utility of expected income and expected utility from income is

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass.The variance of this investment opportunity:

Consider two upward sloping income-utility curves with income on the horizontal axis.The steeper curve represents risk preferences that are more:

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?

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.

Figure 5.3 -The individual pictured in Figure 5.3

Scenario 5.7: As president and CEO of MegaWorld industries,Natasha must decide on some very risky alternative investments.Consider the following: -Refer to Scenario 5.7.As a risk-neutral executive,Natasha

The law of small numbers describes:

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

This year,on advice from your sister,you bought tobacco company stock at $50/share.During the year,you collected an $8 dividend,but due to the company's losses in medical lawsuits its stock fell to $40/share.At this point,you sell,realizing a

Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory?

Last year,on advice from your sister,you bought stock in Burpsy Soda at $100/share.During the year,you collected a $2 dividend and then sold the stock for $120/share.You experienced a

The slope of the budget line,faced by an investor deciding what percentage of her portfolio to place in a risky asset,increases when the

An investment opportunity has two possible outcomes.The expected value of the investment opportunity is $250.One outcome yields a $100 payoff and has a probability of 0.25.What is the payoff of the other outcome?

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 1-83

Markets With Asymmetric Information

Externalities and Public Goods

Filters