Question 1

The pooling of risk is a _____ form of diversification that produces a payoff with a very _____ risk.

Accepted Answer

A) weak;large 
B) weak;small 
C) strong;large 
D) strong;small 
A) weak;large 
B) weak;small 
C) strong;large 
D) strong;small

Question 2

Suppose that an individual is risk-averse.If this individual's utility function is depicted in a graph,with income measured on the horizontal axis and utils on the vertical axis,the graph will be an upward-sloping:

Accepted Answer

A) straight line through the origin. 
B) straight line with a positive vertical intercept. 
C) curve with a steadily increasing slope (i.e. ,a curve that is convex from below). 
D) curve with a steadily decreasing slope (i.e. ,a curve that is concave from below). 
A) straight line through the origin. 
B) straight line with a positive vertical intercept. 
C) curve with a steadily increasing slope (i.e. ,a curve that is convex from below). 
D) curve with a steadily decreasing slope (i.e. ,a curve that is concave from below).

Question 3

Private information leads _____ to expect hidden problems in items offered for sale,leading to _____ prices and to the best items being kept off the market.

Accepted Answer

A) buyers;high 
B) buyers;low 
C) sellers;high 
D) sellers;low 
A) buyers;high 
B) buyers;low 
C) sellers;high 
D) sellers;low

Question 4

The insurance industry operates on the principles of:

Accepted Answer

A) risk trading and diversification. 
B) exploitation and capital accumulation. 
C) moral hazard and irrationality. 
D) adverse selection and diminishing marginal utility. 
A) risk trading and diversification. 
B) exploitation and capital accumulation. 
C) moral hazard and irrationality. 
D) adverse selection and diminishing marginal utility.

Question 5

When an individual knows more about his or her own actions than other people do,incentives are distorted,which causes:

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) screening. 
D) signaling. 
A) moral hazard. 
B) adverse selection. 
C) screening. 
D) signaling.

Question 6

For most families,total utility does NOT:

Accepted Answer

A) rise as income rises. 
B) rise less quickly as income rises. 
C) show increasing marginal utility. 
D) show diminishing marginal utility. 
A) rise as income rises. 
B) rise less quickly as income rises. 
C) show increasing marginal utility. 
D) show diminishing marginal utility.

Question 7

Moral hazard can be reduced by:

Accepted Answer

A) the use of 100% insurance coverage. 
B) imposing a deductible on insurance coverage. 
C) taking away personal stakes for people with private information. 
D) offering fewer incentives to people with private information to act in a less risky manner. 
A) the use of 100% insurance coverage. 
B) imposing a deductible on insurance coverage. 
C) taking away personal stakes for people with private information. 
D) offering fewer incentives to people with private information to act in a less risky manner.

Question 8

The strategy of investing in several assets so that any possible losses are independent events is:

Accepted Answer

A) diversification. 
B) private information. 
C) moral hazard. 
D) adverse selection. 
A) diversification. 
B) private information. 
C) moral hazard. 
D) adverse selection.

Question 9

Companies offering life insurance often require a drug test to determine whether the buyer is a smoker.A smoker must pay a higher premium.This is an example of:

Accepted Answer

A) providing the buyer with a personal stake,a way of dealing with moral hazard. 
B) screening to deal with adverse selection. 
C) the demand curve shifting right because of an increase in risk. 
D) pooling of risk with others. 
A) providing the buyer with a personal stake,a way of dealing with moral hazard. 
B) screening to deal with adverse selection. 
C) the demand curve shifting right because of an increase in risk. 
D) pooling of risk with others.

Question 10

An individual finds that,as their income increases,their total utility also increases,but at a decreasing rate.This occurrence can be attributed to:

Accepted Answer

A) diminishing marginal utility. 
B) being risk-neutral. 
C) expected values. 
D) efficient allocation of risk. 
A) diminishing marginal utility. 
B) being risk-neutral. 
C) expected values. 
D) efficient allocation of risk.

Question 11

Moral hazard occurs when individuals:

Accepted Answer

A) do not do what is in their own best interest. 
B) know more about acceptable business behavior than other people do. 
C) have an incentive to violate their morals. 
D) know more about their actions than other people do. 
A) do not do what is in their own best interest. 
B) know more about acceptable business behavior than other people do. 
C) have an incentive to violate their morals. 
D) know more about their actions than other people do.

Question 12

Use the following to answer question:  
-(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 60%,that it makes it to television but is not the most viewed show in its time slot is 30%,and that it makes it to television and is the most viewed show in its time slot is 10%.As a utility maximizer,Norman:

Accepted Answer

A) should keep his teaching job. 
B) should quit his teaching job and go to Hollywood. 
C) will be indifferent between leaving and staying because his expected income is the same whether he stays a teacher or moves to Hollywood. 
D) will be indifferent between leaving and staying because his expected total utility is the same whether he stays a teacher or moves to Hollywood. 
A) should keep his teaching job. 
B) should quit his teaching job and go to Hollywood. 
C) will be indifferent between leaving and staying because his expected income is the same whether he stays a teacher or moves to Hollywood. 
D) will be indifferent between leaving and staying because his expected total utility is the same whether he stays a teacher or moves to Hollywood.

Question 13

Insurance premiums often fall substantially if a buyer purchases a policy with a high deductible,and such a policy is often purchased by individuals who self-identify as:

Accepted Answer

A) low-risk drivers. 
B) high-risk drivers. 
C) drivers who do not care what their premium costs are. 
D) neither high- nor low-risk drivers. 
A) low-risk drivers. 
B) high-risk drivers. 
C) drivers who do not care what their premium costs are. 
D) neither high- nor low-risk drivers.

Question 14

Mary and Bob are trying to decide how much auto insurance to buy.They share the same expectations of an accident,with the same dollar loss.They also have the same income levels.However,Mary would rather buy very little insurance,while Bob would rather buy much more insurance.This suggests that:

Accepted Answer

A) Bob is more risk-averse than is Mary. 
B) Mary is more risk-averse than is Bob. 
C) Bob is risk-averse and Mary is risk-loving. 
D) Mary is risk-averse and Bob is risk-loving. 
A) Bob is more risk-averse than is Mary. 
B) Mary is more risk-averse than is Bob. 
C) Bob is risk-averse and Mary is risk-loving. 
D) Mary is risk-averse and Bob is risk-loving.

Question 15

Investors in agricultural corporations face many correlated financial risks.Which example does NOT illustrate correlated risks for the agricultural industry?

Accepted Answer

A) losses due to drought and changes in the exchange rate with the euro 
B) political events that can lead to fewer crop subsidies and fewer milk supports 
C) recessions and changes in availability of credit 
D) the spread of genetically modified crops and the presence of locusts 
A) losses due to drought and changes in the exchange rate with the euro 
B) political events that can lead to fewer crop subsidies and fewer milk supports 
C) recessions and changes in availability of credit 
D) the spread of genetically modified crops and the presence of locusts

Question 16

A random variable:

Accepted Answer

A) has an uncertain future value. 
B) has a constant value. 
C) doesn't exist in economics. 
D) is useless in economic decision making. 
A) has an uncertain future value. 
B) has a constant value. 
C) doesn't exist in economics. 
D) is useless in economic decision making.

Question 17

An efficient allocation of risk occurs when those most willing to bear risk insure those who are least willing to bear risk.

Accepted Answer

A) True 
 B)False

Question 18

The wealthy are generally more risk-averse than the poor,since the wealthy have more to lose.

Accepted Answer

A) True 
 B)False

Question 19

The funds that an insurance company may have to pay out are known as the:

Accepted Answer

A) fair premium. 
B) capital at risk. 
C) total premium. 
D) deductible. 
A) fair premium. 
B) capital at risk. 
C) total premium. 
D) deductible.

Question 20

Use the following to answer question:  
-(Table: Utility for Terri and Mary)Use Table: Utility for Terri and Mary.Each has an income of $300.If each were offered insurance to offset the risk of falling income,_____ would pay a larger premium because she is the consumer with _____ risk aversion.

Accepted Answer

A) Terri;more 
B) Terri;less 
C) Mary;more 
D) Mary;less 
A) Terri;more 
B) Terri;less 
C) Mary;more 
D) Mary;less

Exam 20: Uncertainty, Risk, and Private Information

The pooling of risk is a _____ form of diversification that produces a payoff with a very _____ risk.

Suppose that an individual is risk-averse.If this individual's utility function is depicted in a graph,with income measured on the horizontal axis and utils on the vertical axis,the graph will be an upward-sloping:

Private information leads _____ to expect hidden problems in items offered for sale,leading to _____ prices and to the best items being kept off the market.

The insurance industry operates on the principles of:

When an individual knows more about his or her own actions than other people do,incentives are distorted,which causes:

For most families,total utility does NOT:

Moral hazard can be reduced by:

The strategy of investing in several assets so that any possible losses are independent events is:

Companies offering life insurance often require a drug test to determine whether the buyer is a smoker.A smoker must pay a higher premium.This is an example of:

An individual finds that,as their income increases,their total utility also increases,but at a decreasing rate.This occurrence can be attributed to:

Moral hazard occurs when individuals:

Insurance premiums often fall substantially if a buyer purchases a policy with a high deductible,and such a policy is often purchased by individuals who self-identify as:

Mary and Bob are trying to decide how much auto insurance to buy.They share the same expectations of an accident,with the same dollar loss.They also have the same income levels.However,Mary would rather buy very little insurance,while Bob would rather buy much more insurance.This suggests that:

Investors in agricultural corporations face many correlated financial risks.Which example does NOT illustrate correlated risks for the agricultural industry?

A random variable:

An efficient allocation of risk occurs when those most willing to bear risk insure those who are least willing to bear risk.

The wealthy are generally more risk-averse than the poor,since the wealthy have more to lose.

The funds that an insurance company may have to pay out are known as the:

Use the following to answer question: -(Table: Utility for Terri and Mary)Use Table: Utility for Terri and Mary.Each has an income of $300.If each were offered insurance to offset the risk of falling income,_____ would pay a larger premium because she is the consumer with _____ risk aversion.

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

The pooling of risk is a _ form of diversification that produces a payoff with a very _ risk.

Private information leads _ to expect hidden problems in items offered for sale,leading to _ prices and to the best items being kept off the market.

Use the following to answer question: -(Table: Utility for Terri and Mary)Use Table: Utility for Terri and Mary.Each has an income of $300.If each were offered insurance to offset the risk of falling income,_ would pay a larger premium because she is the consumer with _ risk aversion.