Question 1

Which factor is a limit to the ability of diversification to reduce risk?

Accepted Answer

A) losses due to bad decision making 
B) key raw materials 
C) industrial life cycles 
D) economic losses from bad weather 
A) losses due to bad decision making 
B) key raw materials 
C) industrial life cycles 
D) economic losses from bad weather

Question 2

(Scenario: Used-Car Market)Use Scenario: Used-Car Market.If buyers cannot distinguish between lemons and plums,eventually this used-car market will: Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,while cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15,000 and a lemon is worth $3,000.

Accepted Answer

A) be made up mostly of lemons. 
B) have buyers who will have a 50% chance of choosing a plum. 
C) be made up mostly of plums. 
D) be made up of 50% plums and 50% lemons. 
A) be made up mostly of lemons. 
B) have buyers who will have a 50% chance of choosing a plum. 
C) be made up mostly of plums. 
D) be made up of 50% plums and 50% lemons.

Question 3

As the premium for an insurance policy rises,there is a(n)_____ in the _____ insurance.

Accepted Answer

A) decrease;demand for 
B) increase;supply of 
C) decrease;quantity demanded of 
D) decrease;supply of 
A) decrease;demand for 
B) increase;supply of 
C) decrease;quantity demanded of 
D) decrease;supply of

Question 4

Suppose that,for the coming year,a family has calculated its expected value for car repairs to be $3,000.The family decides to buy a car insurance policy that would cover such claims.This insurance policy would cost a total of $3,000 for the household.This insurance policy is:

Accepted Answer

A) overcharging the family and is not fair. 
B) an example of a fair insurance policy. 
C) undercharging the family. 
D) not appropriate for the family,and they should not buy it. 
A) overcharging the family and is not fair. 
B) an example of a fair insurance policy. 
C) undercharging the family. 
D) not appropriate for the family,and they should not buy it.

Question 5

(Scenario: Health Costs)Use Scenario: Health Costs.Given the fact that Alan has a 40% chance of developing a health problem,what is the expected value of Alan's health care costs for the coming year? Scenario: Health Costs
Alan is hoping for a healthy year,meaning that he would have zero health costs.Given his habits,there is a 40% chance that Alan will develop a health issue resulting in $50,000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.

Accepted Answer

A) $0 
B) $50,000 
C) $20,000 
D) $16,000 
A) $0 
B) $50,000 
C) $20,000 
D) $16,000

Question 6

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

Accepted Answer

A) a moral hazard. 
B) risk-loving. 
C) risk-averse. 
D) risk-neutral. 
A) a moral hazard. 
B) risk-loving. 
C) risk-averse. 
D) risk-neutral.

Question 7

If there is a 25% probability that Joseph will earn $10 per hour at his job today and a 75% probability that he will earn $20 per hour today,his expected pay per hour is:

Accepted Answer

A) $10.00. 
B) $15.00. 
C) $17.50. 
D) $20.00. 
A) $10.00. 
B) $15.00. 
C) $17.50. 
D) $20.00.

Question 8

Risk-averse individuals are willing to make deals that reduce their income to reduce their risk.

Accepted Answer

A) True 
 B)False

Question 9

If an individual is risk-averse,then his or her total utility function must display _____ marginal utility.

Accepted Answer

A) constant 
B) diminishing 
C) increasing 
D) either constant or diminishing,but not increasing, 
A) constant 
B) diminishing 
C) increasing 
D) either constant or diminishing,but not increasing,

Question 10

Asymmetric,or private,information:

Accepted Answer

A) is an important explanation of the variation (or asymmetric performance)of individuals on standardized tests. 
B) refers to personal information (e.g. ,regarding gender or ethnicity)that a person is not obligated to reveal on a job application. 
C) is relevant for an economic transaction and is known only by some of the people involved in the transaction. 
D) is protected by patents or copyrights. 
A) is an important explanation of the variation (or asymmetric performance)of individuals on standardized tests. 
B) refers to personal information (e.g. ,regarding gender or ethnicity)that a person is not obligated to reveal on a job application. 
C) is relevant for an economic transaction and is known only by some of the people involved in the transaction. 
D) is protected by patents or copyrights.

Question 11

The total amount of funds that potentially could be paid out by an insurance company is the:

Accepted Answer

A) sum of all premiums collected. 
B) sum of all deductibles received from claims. 
C) capital at risk. 
D) company's liabilities. 
A) sum of all premiums collected. 
B) sum of all deductibles received from claims. 
C) capital at risk. 
D) company's liabilities.

Question 12

We would consider a tornado and a CEO scandal that hit a construction company on the same day as _____ events.

Accepted Answer

A) independent 
B) dependent 
C) premium 
D) probable 
A) independent 
B) dependent 
C) premium 
D) probable

Question 13

The expected value of a random variable is:

Accepted Answer

A) the most frequently occurring value of that variable. 
B) the most recent value of that variable. 
C) the weighted average of all possible values,where the weights on each possible value correspond to the probability of that value occurring. 
D) impossible to determine. 
A) the most frequently occurring value of that variable. 
B) the most recent value of that variable. 
C) the weighted average of all possible values,where the weights on each possible value correspond to the probability of that value occurring. 
D) impossible to determine.

Question 14

Domingo has a total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash.He keeps the cash in a safe deposit box,so that it is completely safe.However,there is a 10% chance that his house will burn down by the end of the year and be worth nothing and a 90% chance that nothing will happen to it.Without insurance,the expected value of his end-of-year wealth is:

Accepted Answer

A) $410,000. 
B) $450,000. 
C) $490,000. 
D) $485,000. 
A) $410,000. 
B) $450,000. 
C) $490,000. 
D) $485,000.

Question 15

(Scenario: Used-Car Market)Use Scenario: Used-Car Market.The expected value of a used car is: Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,while cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15,000 and a lemon is worth $3,000.

Accepted Answer

A) $9,000. 
B) $7,800. 
C) $18,000. 
D) $10,500. 
A) $9,000. 
B) $7,800. 
C) $18,000. 
D) $10,500.

Question 16

If there is a 50% probability that Joseph will earn $10 per hour at his job today and a 50% probability that he will earn $20 per hour today,his expected pay per hour is:

Accepted Answer

A) $10.00. 
B) $12.50. 
C) $15.00. 
D) $20.00. 
A) $10.00. 
B) $12.50. 
C) $15.00. 
D) $20.00.

Question 17

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.Mr.and Mrs.Smith would be willing to pay as much as _____ for insurance to pay their daughter's tuition and eliminate the uncertainty in the family's income after tuition.

Accepted Answer

A) $12,000 
B) $10,000 
C) $8,000 
D) $5,000 
A) $12,000 
B) $10,000 
C) $8,000 
D) $5,000

Question 18

A fair insurance policy is one whose premium:

Accepted Answer

A) is zero. 
B) allows the insurance company to profit. 
C) equals the expected value of the claims. 
D) is higher as the probability of a claim decreases. 
A) is zero. 
B) allows the insurance company to profit. 
C) equals the expected value of the claims. 
D) is higher as the probability of a claim decreases.

Question 19

Two possible events are independent if they happen at different times and in different places.

Accepted Answer

A) True 
 B)False

Question 20

Rhonda would like a better bicycle,and she considers selling her old one by advertising on the bulletin board in the student center.She decides against it because the used bicycles listed on the board are underpriced.This example illustrates the problem of:

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) positive correlation. 
D) risk aversion. 
A) adverse selection. 
B) moral hazard. 
C) positive correlation. 
D) risk aversion.

Which factor is a limit to the ability of diversification to reduce risk?

As the premium for an insurance policy rises,there is a(n)_ in the _ insurance.

Suppose that,for the coming year,a family has calculated its expected value for car repairs to be $3,000.The family decides to buy a car insurance policy that would cover such claims.This insurance policy would cost a total of $3,000 for the household.This insurance policy is:

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

If there is a 25% probability that Joseph will earn $10 per hour at his job today and a 75% probability that he will earn $20 per hour today,his expected pay per hour is:

Risk-averse individuals are willing to make deals that reduce their income to reduce their risk.

If an individual is risk-averse,then his or her total utility function must display _____ marginal utility.

Asymmetric,or private,information:

The total amount of funds that potentially could be paid out by an insurance company is the:

We would consider a tornado and a CEO scandal that hit a construction company on the same day as _____ events.

The expected value of a random variable is:

If there is a 50% probability that Joseph will earn $10 per hour at his job today and a 50% probability that he will earn $20 per hour today,his expected pay per hour is:

A fair insurance policy is one whose premium:

Two possible events are independent if they happen at different times and in different places.

Rhonda would like a better bicycle,and she considers selling her old one by advertising on the bulletin board in the student center.She decides against it because the used bicycles listed on the board are underpriced.This example illustrates the problem of:

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

Which factor is a limit to the ability of diversification to reduce risk?

As the premium for an insurance policy rises,there is a(n)_____ in the _____ insurance.

Suppose that,for the coming year,a family has calculated its expected value for car repairs to be $3,000.The family decides to buy a car insurance policy that would cover such claims.This insurance policy would cost a total of $3,000 for the household.This insurance policy is:

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

If there is a 25% probability that Joseph will earn $10 per hour at his job today and a 75% probability that he will earn $20 per hour today,his expected pay per hour is:

Risk-averse individuals are willing to make deals that reduce their income to reduce their risk.

If an individual is risk-averse,then his or her total utility function must display _____ marginal utility.

Asymmetric,or private,information:

The total amount of funds that potentially could be paid out by an insurance company is the:

We would consider a tornado and a CEO scandal that hit a construction company on the same day as _____ events.

The expected value of a random variable is:

If there is a 50% probability that Joseph will earn $10 per hour at his job today and a 50% probability that he will earn $20 per hour today,his expected pay per hour is:

A fair insurance policy is one whose premium:

Two possible events are independent if they happen at different times and in different places.

Rhonda would like a better bicycle,and she considers selling her old one by advertising on the bulletin board in the student center.She decides against it because the used bicycles listed on the board are underpriced.This example illustrates the problem of:

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

As the premium for an insurance policy rises,there is a(n)_ in the _ insurance.