Question 1

-Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

Accepted Answer

A)  diminishes 
B)  is constant 
C)  increases 
D)  increases first and then diminishes 
A)  diminishes 
B)  is constant 
C)  increases 
D)  increases first and then diminishes

Question 2

If Sally drives less carefully after buying auto insurance, she illustrates

Accepted Answer

A)  adverse selection. 
B)  negative selection. 
C)  moral hazard. 
D)  lemon hazard. 
A)  adverse selection. 
B)  negative selection. 
C)  moral hazard. 
D)  lemon hazard.

Question 3

Moral hazard occurs when an agreement encourages undesirable behavior.

Accepted Answer

A) True 
 B)False

Question 4

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected utility of wealth?

Accepted Answer

A)  between 0 and 200 
B)  245 
C)  270 
D)  between 287 and 300 
A)  between 0 and 200 
B)  245 
C)  270 
D)  between 287 and 300

Question 5

If insured drivers decide to drive more recklessly than uninsured drivers do, then an adverse selection has occurred.

Accepted Answer

A) True 
 B)False

Question 6

-George is considering investing in a frozen yogurt store. If the store does well he will make $20,0000, but if the store does poorly he will make only $10,000. There is a 50 percent chance of each outcome. His utility of wealth schedule is in the above table. The expected utility of this investment is

Accepted Answer

A)  115 
B)  140 
C)  165 
D)  180 
A)  115 
B)  140 
C)  165 
D)  180

Question 7

If buyers cannot assess the quality of used cars but there are warranties for cars,

Accepted Answer

A)  too few lemons are sold. 
B)  too many good used cars are sold. 
C)  good used cars are sold at a higher price than lemons. 
D)  there is an adverse selection problem. 
A)  too few lemons are sold. 
B)  too many good used cars are sold. 
C)  good used cars are sold at a higher price than lemons. 
D)  there is an adverse selection problem.

Question 8

-Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. The maximum amount that Ashton is willing to pay for auto insurance is

Accepted Answer

A)  $6,000 per year. 
B)  $3,000 per year. 
C)  $9,000 per year. 
D)  $10,000 per year. 
A)  $6,000 per year. 
B)  $3,000 per year. 
C)  $9,000 per year. 
D)  $10,000 per year.

Question 9

-Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Andrew will accept the offer that

Accepted Answer

A)  maximizes his expected income. 
B)  maximizes his expected utility. 
C)  maximizes both his expected income and expected utility. 
D)  has the highest weighted average of income and utility. 
A)  maximizes his expected income. 
B)  maximizes his expected utility. 
C)  maximizes both his expected income and expected utility. 
D)  has the highest weighted average of income and utility.

Question 10

-Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

Accepted Answer

A)  $1,000 
B)  $2,000 
C)  $3,000 
D)  $4,000 
A)  $1,000 
B)  $2,000 
C)  $3,000 
D)  $4,000

Question 11

The cost of risk is the same for everyone.

Accepted Answer

A) True 
 B)False

Question 12

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is the minimum amount that the insurance company would require Beatrice to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane? (Assume the insurance company has no other costs.)

Accepted Answer

A)  $10,000 
B)  $30,000 
C)  $40,000 
D)  $60,000 
A)  $10,000 
B)  $30,000 
C)  $40,000 
D)  $60,000

Question 13

Your grade point average acts as ________ to potential employers.

Accepted Answer

A)  a signal 
B)  a reservation price 
C)  a guarantee 
D)  insurance 
A)  a signal 
B)  a reservation price 
C)  a guarantee 
D)  insurance

Question 14

-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, then his expected wealth equals

Accepted Answer

A)  $0. 
B)  $10,000. 
C)  $15,000. 
D)  $20,000. 
A)  $0. 
B)  $10,000. 
C)  $15,000. 
D)  $20,000.

Question 15

Suppose that there are only two types of used cars, peaches and lemons and that used cars are pure experience goods. Peaches are worth $10,000, and lemons are worth $6,000. Three fourths of all used cars are peaches, and one fourth are lemons. In a market with no signals, for instance, a market without warranties, the average value of cars actually sold will be

Accepted Answer

A)  $6,000. 
B)  $7,000. 
C)  $9,000. 
D)  $10,000. 
A)  $6,000. 
B)  $7,000. 
C)  $9,000. 
D)  $10,000.

Question 16

Which of the following statements is correct?

Accepted Answer

A)  Because information is different from typical goods and services, it cannot be provided in a market. 
B)  The marginal benefit from more information does not decrease. 
C)  Too little information is provided if the market for information is a monopoly. 
D)  Acquiring more information can never be inefficient. 
A)  Because information is different from typical goods and services, it cannot be provided in a market. 
B)  The marginal benefit from more information does not decrease. 
C)  Too little information is provided if the market for information is a monopoly. 
D)  Acquiring more information can never be inefficient.

Question 17

-Larry owns a car worth $20,000, and that is his only wealth. There is a 10 percent chance that Larry will have an accident within a year. If he does have an accident, his car is worthless. Larry's utility of wealth curve is shown in the figure above. An insurance company agrees to pay a car owner like Larry the full value of his car in case of an accident if the car owner buys the company's insurance policy. The company's operating expenses are $2,500 per policy.
a) What is Larry's expected wealth?
b) What is Larry's expected utility?
c) What is the maximum amount that Larry is willing to pay for car insurance?
d) What is the minimum premium that the insurance company is willing to accept?
e) Will Larry buy the insurance policy? Why or why not?

Accepted Answer

a) The probability that Larry will have

Question 18

-Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy's expected utility from real estate brokerage is

Accepted Answer

A)  117 
B)  103 
C)  110 
D)  93 
A)  117 
B)  103 
C)  110 
D)  93

Question 19

When would a risk averse individual not insure a risky event?

Accepted Answer

Risk averse individuals are always willi

Question 20

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected income from taking this job?

Accepted Answer

A)  $100 
B)  $350 
C)  $475 
D)  $600 
A)  $100 
B)  $350 
C)  $475 
D)  $600

-Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

If Sally drives less carefully after buying auto insurance, she illustrates

Moral hazard occurs when an agreement encourages undesirable behavior.

If insured drivers decide to drive more recklessly than uninsured drivers do, then an adverse selection has occurred.

If buyers cannot assess the quality of used cars but there are warranties for cars,

-Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

The cost of risk is the same for everyone.

Your grade point average acts as ________ to potential employers.

-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, then his expected wealth equals

Which of the following statements is correct?

When would a risk averse individual not insure a risky event?

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices and Public Goods

Externalities and the Environment

Markets for Factors of Production

Economic Inequality

Extension A: Review

Extension B: Review

Extension C: Review

Extension D: Review

Extension E: Review

Extension F: Review

Filters

Exam 20: Uncertainty and Information

-Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

If Sally drives less carefully after buying auto insurance, she illustrates

Moral hazard occurs when an agreement encourages undesirable behavior.

If insured drivers decide to drive more recklessly than uninsured drivers do, then an adverse selection has occurred.

If buyers cannot assess the quality of used cars but there are warranties for cars,

-Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

The cost of risk is the same for everyone.

Your grade point average acts as ________ to potential employers.

-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, then his expected wealth equals

Which of the following statements is correct?

When would a risk averse individual not insure a risky event?

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices and Public Goods

Externalities and the Environment

Markets for Factors of Production

Economic Inequality

Extension A: Review

Extension B: Review

Extension C: Review

Extension D: Review

Extension E: Review

Extension F: Review

Filters