Question 1

When a consumer makes a risky decision, her:

Accepted Answer

A) utility function is weakly concave. 
B) reservation price is her opportunity cost of risk. 
C) consumption bundles are poorly defined. 
D) demand functions are unknown. 
A) utility function is weakly concave. 
B) reservation price is her opportunity cost of risk. 
C) consumption bundles are poorly defined. 
D) demand functions are unknown. B

Question 2

Given a risk- averse individual and a competitive insurance market in which firms are risk- neutral and incur no operating costs, it can be concluded that an individual's reservation price for
Full- insurance coverage:

Accepted Answer

A) is greater than that of an insurance company. 
B) is less than that of an insurance company. 
C) precludes a viable market for insurance. 
D) is equal to that of an insurance company. 
A) is greater than that of an insurance company. 
B) is less than that of an insurance company. 
C) precludes a viable market for insurance. 
D) is equal to that of an insurance company. A

Question 3

A risk- inclined individual will:

Accepted Answer

A) never like a bet. 
B) place a smaller utility on gaining $100 than on losing $100. 
C) always buy a lottery ticket, whatever his or her chances of winning. 
D) place a greater utility on gaining $100 than on losing $100. 
A) never like a bet. 
B) place a smaller utility on gaining $100 than on losing $100. 
C) always buy a lottery ticket, whatever his or her chances of winning. 
D) place a greater utility on gaining $100 than on losing $100. D

Question 4

Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W2. Maya's expected utility is:

Accepted Answer

A) 12,500. 
B) 7,500. 
C) 10,000. 
D) 15,000. 
A) 12,500. 
B) 7,500. 
C) 10,000. 
D) 15,000.

Question 5

Risk- averse individuals:

Accepted Answer

A) never buy stocks. 
B) buy stocks as a way of spreading the risk. 
C) do not spread risks, they avoid taking chances. 
D) always buy insurance. 
A) never buy stocks. 
B) buy stocks as a way of spreading the risk. 
C) do not spread risks, they avoid taking chances. 
D) always buy insurance.

Question 6

Marvin's utility function is given by U(W)= 10 - 3/(1 + W)and his initial wealth is zero. What is his expected utility from playing a game where he wins $2 on a coin toss if a head appears and nothing if a tail appears?

Accepted Answer

A) 4.5 
B) 7.0 
C) 3.5 
D) 8.0 
A) 4.5 
B) 7.0 
C) 3.5 
D) 8.0

Question 7

A person that is risk neutral will have indifference curves in a state space graph that are

Accepted Answer

A) linear 
B) concave to the origin 
C) L - shaped 
D) convex to the origin 
A) linear 
B) concave to the origin 
C) L - shaped 
D) convex to the origin

Question 8

Given risk- inclined individuals and risk- neutral insurance firms, it is true that the individual's reservation price for full insurance coverage:

Accepted Answer

A) is less than that of an insurance company. 
B) is greater than that of an insurance company. 
C) establishes a viable market for insurance. 
D) is equal to that of an insurance company. 
A) is less than that of an insurance company. 
B) is greater than that of an insurance company. 
C) establishes a viable market for insurance. 
D) is equal to that of an insurance company.

Question 9

Which of the following phenomena constitutes examples of risk- spreading?

Accepted Answer

A) an insurance market 
B) "sharing the bounty" 
C) a risk- pooling arrangement 
D) syndicate ownership 
A) an insurance market 
B) "sharing the bounty" 
C) a risk- pooling arrangement 
D) syndicate ownership

Question 10

Consider the following gamble: on the toss of a fair coin, you receive $10 million if a head appears and nothing if a tail appears. What is the expected payoff from the gamble?

Accepted Answer

A) $3 million 
B) $5 million 
C) $2 million 
D) $1.5 million 
A) $3 million 
B) $5 million 
C) $2 million 
D) $1.5 million

Question 11

Consumers whose marginal utility of wealth diminishes are:

Accepted Answer

A) risk averse. 
B) risk neutral. 
C) undecided about their attitude to risk. 
D) risk seekers. 
A) risk averse. 
B) risk neutral. 
C) undecided about their attitude to risk. 
D) risk seekers.

Question 12

In the state space, along the 45 degree line where wealth in the two states is the same, the slope of an indifference curve is

Accepted Answer

A) 1 - q. 
B) q(1 - q). 
C) q. 
D) q/(1 - q). 
A) 1 - q. 
B) q(1 - q). 
C) q. 
D) q/(1 - q).

Question 13

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk neutral (U(W)= W), which job will she choose?

Accepted Answer

A) she is indifferent between the two jobs 
B) job A 
C) job B 
D) her preferences violate the axioms of expected- utility theory. 
A) she is indifferent between the two jobs 
B) job A 
C) job B 
D) her preferences violate the axioms of expected- utility theory.

Question 14

An individual is more likely to reject a risk- pooling arrangement if:

Accepted Answer

A) he or she experiences rising marginal utility of wealth. 
B) he or she is risk loving. 
C) he or she is risk averse. 
D) he or she experiences decreasing marginal utility of wealth. 
A) he or she experiences rising marginal utility of wealth. 
B) he or she is risk loving. 
C) he or she is risk averse. 
D) he or she experiences decreasing marginal utility of wealth.

Question 15

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk averse (U(W)= W1/2), which job will she choose?

Accepted Answer

A) job B 
B) her preferences violate the axioms of expected- utility theory. 
C) job A 
D) she is indifferent between the two jobs 
A) job B 
B) her preferences violate the axioms of expected- utility theory. 
C) job A 
D) she is indifferent between the two jobs

Question 16

Which of the following is probably not an example of spreading risk?

Accepted Answer

A) a syndicate that owns a fishing boat 
B) a farmer and landowner sharing crop output 
C) a joint venture company exploring for offshore oil 
D) General Motors buying fire insurance from a small insurance company 
A) a syndicate that owns a fishing boat 
B) a farmer and landowner sharing crop output 
C) a joint venture company exploring for offshore oil 
D) General Motors buying fire insurance from a small insurance company

Question 17

Show that if a person's utility of income function is convex (that is, exhibits an increasing marginal utility of income), he or she will prefer fair gambles to income certainty and may even be willing to accept somewhat unfair gambles. Do you believe this sort of risk- taking is common? What might tend to limit its occurrence?

Accepted Answer

The expected utility of a fair gamble wi

Question 18

The continuity assumption states that:

Accepted Answer

A) given any prospect, there is a riskless outcome that can be replaced by another without changing the expected utility from the prospect. 
B) if two prospects involve the same outcomes, a probability, e*, exists that makes an individual indifferent between the prospects. 
C) there is a probability that allows a risky prospect to be substituted for a riskless prospect in an individual's preference ordering. 
D) given any prospect, an equivalent prospect can be created by substituting a prospect that is equivalent to a particular outcome. 
A) given any prospect, there is a riskless outcome that can be replaced by another without changing the expected utility from the prospect. 
B) if two prospects involve the same outcomes, a probability, e*, exists that makes an individual indifferent between the prospects. 
C) there is a probability that allows a risky prospect to be substituted for a riskless prospect in an individual's preference ordering. 
D) given any prospect, an equivalent prospect can be created by substituting a prospect that is equivalent to a particular outcome.

Question 19

Discuss the implications of the degree of realism characterizing the assumptions of the expected- utility theorem on its ability to generate true prediction.

Accepted Answer

Clearly, theories do not have to have re

Question 20

Most economic decisions are made under conditions of:

Accepted Answer

A) probability. 
B) risk. 
C) certainty. 
D) uncertainty. 
A) probability. 
B) risk. 
C) certainty. 
D) uncertainty.

When a consumer makes a risky decision, her:

Given a risk- averse individual and a competitive insurance market in which firms are risk- neutral and incur no operating costs, it can be concluded that an individual's reservation price for Full- insurance coverage:

A risk- inclined individual will:

Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W². Maya's expected utility is:

Risk- averse individuals:

Marvin's utility function is given by U(W)= 10 - 3/(1 + W)and his initial wealth is zero. What is his expected utility from playing a game where he wins $2 on a coin toss if a head appears and nothing if a tail appears?

A person that is risk neutral will have indifference curves in a state space graph that are

Given risk- inclined individuals and risk- neutral insurance firms, it is true that the individual's reservation price for full insurance coverage:

Which of the following phenomena constitutes examples of risk- spreading?

Consider the following gamble: on the toss of a fair coin, you receive $10 million if a head appears and nothing if a tail appears. What is the expected payoff from the gamble?

Consumers whose marginal utility of wealth diminishes are:

In the state space, along the 45 degree line where wealth in the two states is the same, the slope of an indifference curve is

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk neutral (U(W)= W), which job will she choose?

An individual is more likely to reject a risk- pooling arrangement if:

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk averse (U(W)= W^1/2), which job will she choose?

Which of the following is probably not an example of spreading risk?

The continuity assumption states that:

Discuss the implications of the degree of realism characterizing the assumptions of the expected- utility theorem on its ability to generate true prediction.

Most economic decisions are made under conditions of:

Microeconomics: a Working Methodology

A Theory of Preferences

Demand Theory

More Demand Theory

Intertemporal Decision Making and Capital Values

Production Cost: One Variable Input

Production Cost: Many Variable Inputs

The Theory of Perfect Competition

Applications of the Competitive Model

Monopoly

Input Markets and the Allocation of Resources

Labour Market Applications

Competitive General Equilibrium

Price Discrimination Monopoly Practices

Introduction to Game Theory

Game Theory and Oligopoly

Assymmetric Information, the Rules of the Game, and Externalities

The Theory of the Firm

Assymetric Information and Market Behaviour

Filters

Exam 17: Choice Making Under Uncertainty

When a consumer makes a risky decision, her:

Given a risk- averse individual and a competitive insurance market in which firms are risk- neutral and incur no operating costs, it can be concluded that an individual's reservation price for Full- insurance coverage:

A risk- inclined individual will:

Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W2. Maya's expected utility is:

Risk- averse individuals:

Marvin's utility function is given by U(W)= 10 - 3/(1 + W)and his initial wealth is zero. What is his expected utility from playing a game where he wins $2 on a coin toss if a head appears and nothing if a tail appears?

A person that is risk neutral will have indifference curves in a state space graph that are

Given risk- inclined individuals and risk- neutral insurance firms, it is true that the individual's reservation price for full insurance coverage:

Which of the following phenomena constitutes examples of risk- spreading?

Consider the following gamble: on the toss of a fair coin, you receive $10 million if a head appears and nothing if a tail appears. What is the expected payoff from the gamble?

Consumers whose marginal utility of wealth diminishes are:

In the state space, along the 45 degree line where wealth in the two states is the same, the slope of an indifference curve is

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk neutral (U(W)= W), which job will she choose?

An individual is more likely to reject a risk- pooling arrangement if:

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk averse (U(W)= W1/2), which job will she choose?

Which of the following is probably not an example of spreading risk?

The continuity assumption states that:

Discuss the implications of the degree of realism characterizing the assumptions of the expected- utility theorem on its ability to generate true prediction.

Most economic decisions are made under conditions of:

Microeconomics: a Working Methodology

A Theory of Preferences

Demand Theory

More Demand Theory

Intertemporal Decision Making and Capital Values

Production Cost: One Variable Input

Production Cost: Many Variable Inputs

The Theory of Perfect Competition

Applications of the Competitive Model

Monopoly

Input Markets and the Allocation of Resources

Labour Market Applications

Competitive General Equilibrium

Price Discrimination Monopoly Practices

Introduction to Game Theory

Game Theory and Oligopoly

Assymmetric Information, the Rules of the Game, and Externalities

The Theory of the Firm

Assymetric Information and Market Behaviour

Filters

Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W². Maya's expected utility is:

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk averse (U(W)= W^1/2), which job will she choose?