Question 1

Signals are believable when the cost of sending a

Accepted Answer

A)  false signal is known to be low. 
B)  false signal is known to be high. 
C)  true or false signal is known to be low. 
D)  true signal is known to be high. 
A)  false signal is known to be low. 
B)  false signal is known to be high. 
C)  true or false signal is known to be low. 
D)  true signal is known to be high.

Question 2

-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 destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is the maximum amount that Beatrice would be willing to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane?

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 3

Because Don has health insurance, he is more likely to see the doctor when he has a cold. This is an example of

Accepted Answer

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

Question 4

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Accepted Answer

A)  car sellers would never lie. 
B)  car buyers are gullible. 
C)  the signal cannot be false. 
D)  a false signal can be costly to the seller. 
A)  car sellers would never lie. 
B)  car buyers are gullible. 
C)  the signal cannot be false. 
D)  a false signal can be costly to the seller.

Question 5

-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 expected income from taking this job?

Accepted Answer

A)  $4,000 
B)  $6,000 
C)  $2,000 
D)  $10,000 
A)  $4,000 
B)  $6,000 
C)  $2,000 
D)  $10,000

Question 6

Hostess Brands is selling off its assets after liquidation. A potential buyer for the Twinkies brand has found that the total revenue will be $3 billion a year if the brand is managed well and $1 billion a year if the brand is managed poorly. There is .6 (or 60 percent) chance of managing the brand well and a .4 (or 40 percent) chance of managing the brand poorly. What is the expected total revenue?

Accepted Answer

A)  $0.4 billion 
B)  $1.2 billion 
C)  $1.8 billion 
D)  $2.2 billion 
A)  $0.4 billion 
B)  $1.2 billion 
C)  $1.8 billion 
D)  $2.2 billion

Question 7

In the market for automobile insurance, adverse selection implies that

Accepted Answer

A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  insured and uninsured alike will take greater risks. 
D)  drivers with greater risks are more likely to buy insurance. 
A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  insured and uninsured alike will take greater risks. 
D)  drivers with greater risks are more likely to buy insurance.

Question 8

Erika's utility with $3,000 of wealth is 6,000 and her utility with $3,001 of wealth is 6,005. Her marginal utility from gaining the additional $1 of wealth is ________.

Accepted Answer

A)  6,005 
B)  3,001 
C)  6,000 
D)  5 
A)  6,005 
B)  3,001 
C)  6,000 
D)  5

Question 9

The slope of the utility of wealth curve of a risk-averse person

Accepted Answer

A)  increases as wealth increases. 
B)  decreases as wealth increases. 
C)  is constant. 
D)  is negative. 
A)  increases as wealth increases. 
B)  decreases as wealth increases. 
C)  is constant. 
D)  is negative.

Question 10

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. What's Adriana's expected income?

Accepted Answer

A)  $4,000 
B)  $4,500 
C)  $2,000 
D)  $3,000 
A)  $4,000 
B)  $4,500 
C)  $2,000 
D)  $3,000

Question 11

The International Maritime Bureau said the waters off Somalia are the world's most dangerous, accounting for nearly a third reported pirate attacks worldwide between January and September 2008. Suppose all boats are insured to $100,000 and pay a premium of $10,000 each. Suppose 10 out of 100 boats are attacked by pirates and these 10 file claims with their insurance. If the insurance company's only costs are the claims it must pay, has the insurance company earned an economic profit?

Accepted Answer

A)  Yes, they earned an economic profit of $90,000. 
B)  No, they broke even. 
C)  No, they sustained an economic loss of $90,000. 
D)  Yes, they earned an economic profit of $1,000,000. 
A)  Yes, they earned an economic profit of $90,000. 
B)  No, they broke even. 
C)  No, they sustained an economic loss of $90,000. 
D)  Yes, they earned an economic profit of $1,000,000.

Question 12

If Ben becomes less likely to buy smoke detectors after he has fire insurance, he is illustrating

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  the lemon problem. 
D)  the free rider problem. 
A)  moral hazard. 
B)  adverse selection. 
C)  the lemon problem. 
D)  the free rider problem.

Question 13

Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000, and lemons are worth $4,000. If the market is such that only lemons are sold, then used cars are

Accepted Answer

A)  experience goods and the used car market has effective signals. 
B)  experience goods and the used car market lacks effective signals. 
C)  not experience goods and the used car market has effective signals. 
D)  not experience goods and the used car market lacks effective signals. 
A)  experience goods and the used car market has effective signals. 
B)  experience goods and the used car market lacks effective signals. 
C)  not experience goods and the used car market has effective signals. 
D)  not experience goods and the used car market lacks effective signals.

Question 14

Insurance works because

Accepted Answer

A)  all policyholders pay in according to risks and all then receive a pay out in return. 
B)  all policyholders pay in according to risks and then receive a pay out only if they incur a loss. 
C)  all policyholders pay in according to risks and nobody receives any pay out. 
D)  only high risk policyholders pay in while everyone is entitled to a pay out. 
A)  all policyholders pay in according to risks and all then receive a pay out in return. 
B)  all policyholders pay in according to risks and then receive a pay out only if they incur a loss. 
C)  all policyholders pay in according to risks and nobody receives any pay out. 
D)  only high risk policyholders pay in while everyone is entitled to a pay out.

Question 15

What is expected utility?

Accepted Answer

Expected utility is

Question 16

Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn't cover the debt. Federally regulated lenders must have mortgage insurance on loans where the buyer's down payment is less than 20 per cent of the price. In this example, what signal do potential homeowners give to indicate they are low-risk?

Accepted Answer

A)  Indicating high income 
B)  Buying an expensive home 
C)  Having a large down payment 
D)  Buying an inexpensive home 
A)  Indicating high income 
B)  Buying an expensive home 
C)  Having a large down payment 
D)  Buying an inexpensive home

Question 17

-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 annual income from real estate brokerage is

Accepted Answer

A)  $39,000 
B)  $42,500 
C)  $33,000 
D)  $47,500 
A)  $39,000 
B)  $42,500 
C)  $33,000 
D)  $47,500

Question 18

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If the state lottery offers a 1 in 10,000 chance of winning $10,000, John will

Accepted Answer

A)  pay whatever price it takes to play. 
B)  pay $1 to play this game. 
C)  pay less than $1 to play this game. 
D)  not be willing to play this game at any price. 
A)  pay whatever price it takes to play. 
B)  pay $1 to play this game. 
C)  pay less than $1 to play this game. 
D)  not be willing to play this game at any price.

Question 19

In the market for automobile insurance, moral hazard implies that

Accepted Answer

A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  insured and uninsured alike will take greater risks. 
D)  drivers with greater risks are more likely to buy insurance. 
A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  insured and uninsured alike will take greater risks. 
D)  drivers with greater risks are more likely to buy insurance.

Question 20

-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 expected utility from taking this job?

Accepted Answer

A)  40 
B)  50 
C)  60 
D)  70 
A)  40 
B)  50 
C)  60 
D)  70

Exam 20: Uncertainty and Information

Signals are believable when the cost of sending a

Because Don has health insurance, he is more likely to see the doctor when he has a cold. This is an example of

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

-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 expected income from taking this job?

In the market for automobile insurance, adverse selection implies that

Erika's utility with $3,000 of wealth is 6,000 and her utility with $3,001 of wealth is 6,005. Her marginal utility from gaining the additional $1 of wealth is ________.

The slope of the utility of wealth curve of a risk-averse person

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. What's Adriana's expected income?

If Ben becomes less likely to buy smoke detectors after he has fire insurance, he is illustrating

Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000, and lemons are worth $4,000. If the market is such that only lemons are sold, then used cars are

Insurance works because

What is expected utility?

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If the state lottery offers a 1 in 10,000 chance of winning $10,000, John will

In the market for automobile insurance, moral hazard implies that

-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 expected utility from taking this job?

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

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