Question 1

Moral hazard:

Accepted Answer

A) occurs when incentives are distorted because an individual knows more about his or her own actions than other people do. 
B) is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting). 
C) is a term used synonymously with value judgment. 
D) refers to the questionable morality of price gouging in hazardous times (e.g. ,in the presence of famines or floods). 
A) occurs when incentives are distorted because an individual knows more about his or her own actions than other people do. 
B) is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting). 
C) is a term used synonymously with value judgment. 
D) refers to the questionable morality of price gouging in hazardous times (e.g. ,in the presence of famines or floods).

Question 2

Sellers of used cars may have private information to which buyers are not privy.This knowledge of private information does NOT lead to:

Accepted Answer

A) lower prices for the cars. 
B) a shortage of used cars on the market. 
C) many mutually beneficial transactions not taking place. 
D) potential sellers willing to sell only at high prices. 
A) lower prices for the cars. 
B) a shortage of used cars on the market. 
C) many mutually beneficial transactions not taking place. 
D) potential sellers willing to sell only at high prices.

Question 3

(Scenario: Flood Area)Use Scenario: Flood Area.Suppose that an insurance company offers you flood insurance.MOST likely,this insurance would require a premium payment: Scenario: Flood Area
Suppose that you own a home that is estimated to be worth $250,000.You live in a flood plain;as a result,the probability that you will lose your home to a flood is 30%.

Accepted Answer

A) greater than $250,000. 
B) greater than $75,000. 
C) less than $15,000. 
D) equal to $100,000. 
A) greater than $250,000. 
B) greater than $75,000. 
C) less than $15,000. 
D) equal to $100,000.

Question 4

Use the following to answer question:  
-(Table: Income and Utility for Whitney)Use Table: Income and Utility for Whitney.Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000.What certain income leaves Whitney as well off as her uncertain income?

Accepted Answer

A) $64,000 
B) $60,000 
C) $54,000 
D) $50,000 
A) $64,000 
B) $60,000 
C) $54,000 
D) $50,000

Question 5

At the end of the 1980s,Lloyd's of London was in severe financial trouble because of:

Accepted Answer

A) a major recession in Western Europe and the United States. 
B) terror attacks by the IRA. 
C) asbestos claims. 
D) the war in Iraq. 
A) a major recession in Western Europe and the United States. 
B) terror attacks by the IRA. 
C) asbestos claims. 
D) the war in Iraq.

Question 6

Use the following to answer question:  
-(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family's expected total utility is _____ utils.

Accepted Answer

A) 4,175 
B) 3,700 
C) 3,620 
D) 3,210 
A) 4,175 
B) 3,700 
C) 3,620 
D) 3,210

Question 7

You are about to have a meeting with your manager about a raise in your salary.You are going to request an increase of $5,000,but you believe the probability of success to be only 25%.You believe there is a 25% probability your boss will counter with a $3,000 raise and a 25% probability that your boss will offer a $1,000 raise.Finally,there is a 25% probability that you will receive no increase in your salary.What is the expected value of the outcome of your meeting?

Accepted Answer

A) $2,250 
B) $9,000 
C) $6,750 
D) $3,000 
A) $2,250 
B) $9,000 
C) $6,750 
D) $3,000

Question 8

For MOST families,the marginal utility of income is:

Accepted Answer

A) increasing. 
B) constant. 
C) diminishing. 
D) unknown;the answer depends on the value of income. 
A) increasing. 
B) constant. 
C) diminishing. 
D) unknown;the answer depends on the value of income.

Question 9

Assume that flood insurance premiums are determined in the competitive market.Suppose that devastating floods along the Mississippi River have increased the degree of risk aversion among the insurance investors in this market.The _____ insurance shifts _____,leading to a(n)_____ in equilibrium premiums and a(n)_____ in the quantity of insurance bought and sold.

Accepted Answer

A) supply of;rightward;decrease;increase 
B) demand for;leftward;decrease;decrease 
C) supply of;leftward;increase;decrease 
D) demand for;rightward;increase;increase 
A) supply of;rightward;decrease;increase 
B) demand for;leftward;decrease;decrease 
C) supply of;leftward;increase;decrease 
D) demand for;rightward;increase;increase

Question 10

In practice,insurance companies faced with adverse selection use _____ to deal with it.

Accepted Answer

A) moral hazard 
B) deductibles 
C) signals 
D) co-pays 
A) moral hazard 
B) deductibles 
C) signals 
D) co-pays

Question 11

Use the following to answer question:  
-(Table: Natasha's Total Utility)Use Table: Natasha's Total Utility.Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work.If there is a 25% probability that Natasha will be late with her work and her income will equal $30,000,the premium for a fair insurance policy to eliminate the uncertainty in her income would equal:

Accepted Answer

A) $4,000. 
B) $5,000. 
C) $7,500. 
D) $9,500. 
A) $4,000. 
B) $5,000. 
C) $7,500. 
D) $9,500.

Question 12

Use the following to answer question:  
-(Table: Income and Utility for Tyler)Use Table: Income and Utility for Tyler.The table shows the utility Tyler receives at various income levels,but she does not know what her income will be next year.There is a 40% chance her income will be $20,000,a 40% chance her income will be $30,000,and a 20% chance her income will be $40,000.We know that Tyler is risk-averse because:

Accepted Answer

A) she would prefer $40,000,but there is a risk she will make only $20,000. 
B) her expected income is less than what she may actually earn. 
C) her expected income is more than what she may actually earn. 
D) she is subject to diminishing marginal utility from income. 
A) she would prefer $40,000,but there is a risk she will make only $20,000. 
B) her expected income is less than what she may actually earn. 
C) her expected income is more than what she may actually earn. 
D) she is subject to diminishing marginal utility from income.

Moral hazard:

Sellers of used cars may have private information to which buyers are not privy.This knowledge of private information does NOT lead to:

At the end of the 1980s,Lloyd's of London was in severe financial trouble because of:

Use the following to answer question: -(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family's expected total utility is _____ utils.

For MOST families,the marginal utility of income is:

In practice,insurance companies faced with adverse selection use _____ to deal with it.

First Principles

Economic Models: Trade-Offs and Trade

Consumer and Producer Surplus

Supply and Demand

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences and Consumer Choice

Filters

Exam 20: Uncertainty, Risk, and Private Information

Moral hazard:

Sellers of used cars may have private information to which buyers are not privy.This knowledge of private information does NOT lead to:

At the end of the 1980s,Lloyd's of London was in severe financial trouble because of:

Use the following to answer question: -(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family's expected total utility is _____ utils.

For MOST families,the marginal utility of income is:

In practice,insurance companies faced with adverse selection use _____ to deal with it.

First Principles

Economic Models: Trade-Offs and Trade

Consumer and Producer Surplus

Supply and Demand

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences and Consumer Choice

Filters