Question 1

Which of the following is NOT a generally accepted measure of the riskiness of an investment?

Accepted Answer

A) Standard deviation 
B) Expected value 
C) Variance 
D) none of the above 
A) Standard deviation 
B) Expected value 
C) Variance 
D) none of the above

Question 2

Figure 5.1
-An individual whose attitude toward risk is illustrated in Figure 5.1 is

Accepted Answer

A) risk averse. 
B) risk loving. 
C) risk neutral. 
D) None of the above is necessarily correct. 
A) risk averse. 
B) risk loving. 
C) risk neutral. 
D) None of the above is necessarily correct.

Question 3

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 4

C and S Metal Company produces stainless steel pots and pans.C and S can pursue either of two distribution plans for the coming year.The firm can either produce pots and pans for sale under a discount store label or manufacture a higher quality line for specialty stores and expensive mail order catalogs.High initial setup costs along with C and S's limited capacity make it impossible for the firm to produce both lines.Profits under each plan depend upon the state of the economy.One of three conditions will prevail:
growth (probability = 0.3)
normal (probability = 0.5)
recession (probability = 0.2)
The outcome under each plan for each state of the economy is given in the table below.Figures in the table are profits measured in dollars.The probabilities for each economic condition represent crude estimates.
Economic Condition Discount Line Specialty Line
Growth 250,000 400,000
Normal 220,000 230,000
Recession 140,000 20,000
a.Calculate the expected value for each alternative.
b.Which alternative is more risky? (Calculate the standard deviation of profits for each alternative.)
c.Taking into account the importance of risk,which alternative should an investor choose?

Accepted Answer

a. Expected Value Discount Line 0.3(250,

Question 5

Because of the relationship between an asset's real rate of return and its risk,one would expect to find all of the following,except one.Which one?

Accepted Answer

A) Corporate stocks have higher rates of return than U.S.Treasury bonds. 
B) Corporate stocks have higher rates of return than U.S.Treasury bills. 
C) Corporate stocks have higher rates of return than corporate bonds. 
D) Stocks of smaller companies have higher expected rates of return than stocks of larger companies. 
E) Mutual funds including stocks of companies in politically volatile developing countries do not have as high a rate of return as mutual funds restricted to stocks of companies in developed economies. 
A) Corporate stocks have higher rates of return than U.S.Treasury bonds. 
B) Corporate stocks have higher rates of return than U.S.Treasury bills. 
C) Corporate stocks have higher rates of return than corporate bonds. 
D) Stocks of smaller companies have higher expected rates of return than stocks of larger companies. 
E) Mutual funds including stocks of companies in politically volatile developing countries do not have as high a rate of return as mutual funds restricted to stocks of companies in developed economies.

Question 6

Is it possible for an investor to allocate more than 100% of their assets to the stock market?

Accepted Answer

A) No,this is not theoretically plausible. 
B) No,federal law prohibits this kind of investment. 
C) Yes,investors can borrow money to buy stocks on margin. 
D) none of the above 
A) No,this is not theoretically plausible. 
B) No,federal law prohibits this kind of investment. 
C) Yes,investors can borrow money to buy stocks on margin. 
D) none of the above

Question 7

Amos Long's marginal utility of income function is given as: MU(I)= I1.5,where I represents income.From this you would say that he is

Accepted Answer

A) risk averse. 
B) risk loving. 
C) risk neutral. 
D) none of the above 
A) risk averse. 
B) risk loving. 
C) risk neutral. 
D) none of the above

Question 8

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

Question 9

The concept of a risk premium applies to a person that is

Accepted Answer

A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) all of the above 
A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) all of the above

Question 10

Fine-dining restaurants commonly provide statements in their menus such as,"A 20% gratuity will be added to all checks for parties of six or more patrons." Given that this statement tends to raise the level of tips or gratuities left by other groups of diners,the statement is a good example of:

Accepted Answer

A) the endowment effect. 
B) loss aversion. 
C) anchoring. 
D) none of the above 
A) the endowment effect. 
B) loss aversion. 
C) anchoring. 
D) none of the above

Question 11

Suppose an investor equally allocates their wealth between a risk-free asset and a risky asset.If the MRS of the current allocation is less than the slope of the budget line,then the investor should:

Accepted Answer

A) shift more of their wealth to the risky asset. 
B) shift more of their wealth to the risk-free asset. 
C) keep the same asset allocation. 
D) We do not have enough information to answer this question. 
A) shift more of their wealth to the risky asset. 
B) shift more of their wealth to the risk-free asset. 
C) keep the same asset allocation. 
D) We do not have enough information to answer this question.

Question 12

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 13

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 14

What is a reference point?

Accepted Answer

A) the value of a good on the black market 
B) the point from which an individual makes a consumption decision 
C) a subjective valuation of a good 
D) the minimum price that an individual would sell a good that she currently owns 
E) none of the above 
A) the value of a good on the black market 
B) the point from which an individual makes a consumption decision 
C) a subjective valuation of a good 
D) the minimum price that an individual would sell a good that she currently owns 
E) none of the above

Question 15

A person with a diminishing marginal utility of income

Accepted Answer

A) will be risk averse. 
B) will be risk neutral. 
C) will be risk loving. 
D) cannot decide without more information 
A) will be risk averse. 
B) will be risk neutral. 
C) will be risk loving. 
D) cannot decide without more information

Question 16

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:

Accepted Answer

A) the insurance companies have monopoly rights issued by state regulators. 
B) the insurance companies are risk averse. 
C) there are administrative costs and other expenses that must be covered by the premia. 
D) insurance companies tend to over-state the risks they face. 
A) the insurance companies have monopoly rights issued by state regulators. 
B) the insurance companies are risk averse. 
C) there are administrative costs and other expenses that must be covered by the premia. 
D) insurance companies tend to over-state the risks they face.

Question 17

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 are equally risk averse. 
B) Investor A is more risk averse than investor B. 
C) Investor A is less risk averse than investor B. 
D) It is not possible to say anything about the risk aversion of the two investors,but they will hold the same portfolio. 
E) It is not possible to say anything about either the risk aversion or the portfolio of the two investors. 
A) Investors A and B are equally risk averse. 
B) Investor A is more risk averse than investor B. 
C) Investor A is less risk averse than investor B. 
D) It is not possible to say anything about the risk aversion of the two investors,but they will hold the same portfolio. 
E) It is not possible to say anything about either the risk aversion or the portfolio of the two investors.

Question 18

As president and CEO of MegaWorld industries,you must decide on some very risky alternative investments:   The highest expected return belongs to investment

Accepted Answer

A) 
A)  
B) 
B)  
C) 
C)  
D) 
D)  
A) 
A)  
B) 
B)  
C) 
C)  
D) 
D)

Question 19

Virginia Tyson is a widow whose primary income is provided by earnings received from her husband's $200,000 estate.The table below shows the relationship between income and total utility for Virginia.
Income Total Utility
5,000 12
10,000 22
15,000 30
20,000 36
25,000 40
30,000 42
a.Construct the marginal utility table for Virginia.What is her attitude
toward risk? Explain your answer including a description of the marginal
utility for individuals whose risk preferences are different from Virginia's.
b.Virginia is currently earning 10% on her $200,000 in a riskless investment.
Alternatively,she could invest in a project that has a 0.4 probability of yielding
a $30,000 return on her investment and a 0.6 probability of paying $10,000.
Should she alter her strategy and move her $200,000 to the more risky project?

Accepted Answer

a. Income TU MU 5,000 12 10,000 22 10 15

Question 20

Consider the following information about job opportunities for new college graduates in Megalopolis:
Table 5.1  
-Refer to Table 5.1.Ranked highest to lowest in expected income,the majors are

Accepted Answer

A) economics,accounting,English,mathematics,political science. 
B) mathematics,English,political science,accounting,economics. 
C) economics,accounting,mathematics,English,political science. 
D) English,economics,mathematics,accounting,political science. 
E) accounting,English,mathematics,political science,economics. 
A) economics,accounting,English,mathematics,political science. 
B) mathematics,English,political science,accounting,economics. 
C) economics,accounting,mathematics,English,political science. 
D) English,economics,mathematics,accounting,political science. 
E) accounting,English,mathematics,political science,economics.

Which of the following is NOT a generally accepted measure of the riskiness of an investment?

Figure 5.1 -An individual whose attitude toward risk is illustrated in Figure 5.1 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

Because of the relationship between an asset's real rate of return and its risk,one would expect to find all of the following,except one.Which one?

Is it possible for an investor to allocate more than 100% of their assets to the stock market?

Amos Long's marginal utility of income function is given as: MU(I)= I^1.5,where I represents income.From this you would say that he is

The concept of a risk premium applies to a person that is

Fine-dining restaurants commonly provide statements in their menus such as,"A 20% gratuity will be added to all checks for parties of six or more patrons." Given that this statement tends to raise the level of tips or gratuities left by other groups of diners,the statement is a good example of:

Suppose an investor equally allocates their wealth between a risk-free asset and a risky asset.If the MRS of the current allocation is less than the slope of the budget line,then the investor should:

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

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.

What is a reference point?

A person with a diminishing marginal utility of income

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:

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.

As president and CEO of MegaWorld industries,you must decide on some very risky alternative investments: The highest expected return belongs to investment

Consider the following information about job opportunities for new college graduates in Megalopolis: Table 5.1 -Refer to Table 5.1.Ranked highest to lowest in expected income,the majors are

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

Which of the following is NOT a generally accepted measure of the riskiness of an investment?

Figure 5.1 -An individual whose attitude toward risk is illustrated in Figure 5.1 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

Because of the relationship between an asset's real rate of return and its risk,one would expect to find all of the following,except one.Which one?

Is it possible for an investor to allocate more than 100% of their assets to the stock market?

Amos Long's marginal utility of income function is given as: MU(I)= I1.5,where I represents income.From this you would say that he is

The concept of a risk premium applies to a person that is

Fine-dining restaurants commonly provide statements in their menus such as,"A 20% gratuity will be added to all checks for parties of six or more patrons." Given that this statement tends to raise the level of tips or gratuities left by other groups of diners,the statement is a good example of:

Suppose an investor equally allocates their wealth between a risk-free asset and a risky asset.If the MRS of the current allocation is less than the slope of the budget line,then the investor should:

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

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.

What is a reference point?

A person with a diminishing marginal utility of income

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:

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.

As president and CEO of MegaWorld industries,you must decide on some very risky alternative investments: The highest expected return belongs to investment

Consider the following information about job opportunities for new college graduates in Megalopolis: Table 5.1 -Refer to Table 5.1.Ranked highest to lowest in expected income,the majors are

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

Amos Long's marginal utility of income function is given as: MU(I)= I^1.5,where I represents income.From this you would say that he is

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.