Question 1

Which of the following represents the utility function of a risk lover?

Accepted Answer

A) U(w)= w1/8 - 17 
B) U(w)= w2 + w + 17 
C) U(w)= w1/2 + w - 17 
D) U(w)= w + 17 
A) U(w)= w1/8 - 17 
B) U(w)= w2 + w + 17 
C) U(w)= w1/2 + w - 17 
D) U(w)= w + 17

Question 2

The reservation demand price for insurance is:

Accepted Answer

A) the exact amount a person is willing to pay for insurance. 
B) equal to the expected value of the gamble. 
C) the minimum amount a person is willing to pay for insurance. 
D) the maximum amount a person is willing to pay for insurance. 
A) the exact amount a person is willing to pay for insurance. 
B) equal to the expected value of the gamble. 
C) the minimum amount a person is willing to pay for insurance. 
D) the maximum amount a person is willing to pay for insurance.

Question 3

The effort of carrying an umbrella reduces my utility by 1/2 a unit. If it rains and I have no umbrella, my utility falls by 3 units, whilst it only falls by 1 unit if I do have an umbrella. I consider that the probability it will rain is 1/2.Therefore I carry an umbrella.

Accepted Answer

A) True 
 B)False

Question 4

An individual is said to be risk- averse if:

Accepted Answer

A) w1 is preferred with certainty to a gamble expected to payoff w1. 
B) the utility function exhibits increasing marginal utility of wealth. 
C) the utility function exhibits constant marginal utility of wealth. 
D) prefer all certain prospects over a particularly risky prospect. 
A) w1 is preferred with certainty to a gamble expected to payoff w1. 
B) the utility function exhibits increasing marginal utility of wealth. 
C) the utility function exhibits constant marginal utility of wealth. 
D) prefer all certain prospects over a particularly risky prospect.

Question 5

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1, U(1000)= 0, and U(2000)=5/8. What is the correct preference ranking?

Accepted Answer

A) a is indifferent to b 
B) a is preferred to b 
C) b is preferred to a 
D) a preference ranking cannot be found with the given information 
A) a is indifferent to b 
B) a is preferred to b 
C) b is preferred to a 
D) a preference ranking cannot be found with the given information

Question 6

The expected utility hypothesis requires all of the assumptions used to study utility under certainty and all of the following except:

Accepted Answer

A) continuity. 
B) ordering. 
C) substitution. 
D) income. 
A) continuity. 
B) ordering. 
C) substitution. 
D) income.

Question 7

Bianca loves the Toronto Blue Jays. This year they made it to the World Series. Bianca has $1000 in savings. She could spend $600 of the $1000 in making Blue Jays baseball caps. Then, if the Blue Jays win, she estimates that she would earn $1500. If they lose, she won't be able to sell any of her stock. Bianca figures that the Blue Jays have a 0.6 chance of winning the World Series. Bianca's utility function is given by U(w)=w1/2 .
i)If Bianca is an expected utility maximizer, will she make the $600 investment into Blue Jays caps?
ii)Suppose that a friend offers her insurance. He says to Bianca, "If you pay me F dollars whether or not the Blue Jays win, then, in the event that they lose, I will pay you $1500, the amount that you would have earned had they won the World Series. If the Blue Jays lose, I will pay you nothing." What is the maximum value of F that Bianca is willing to pay for the insurance policy?

Accepted Answer

i)If Blue Jays win (state 1), Bianca wil

Question 8

Consider the following prospects, in which w1 > w2 > w3; a: (1/3, 1/3, 1/3: w1, w2, w3); b: (1/4, 1/2, 1/4: w1, w2, w3); and c: (0, 1, 0: w1, w2, w3). Shelly reports that a is preferred to b, and that c is preferred to a.

Accepted Answer

A) Shelly is risk inclined. 
B) Shelly is risk averse. 
C) Shelly is risk neutral. 
D) Her preferences are inconsistent with expected utility theory. 
A) Shelly is risk inclined. 
B) Shelly is risk averse. 
C) Shelly is risk neutral. 
D) Her preferences are inconsistent with expected utility theory.

Question 9

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 is able to buy an insurance policy to cover her bracelet against theft. How much would she be willing to pay for the insurance?

Accepted Answer

A) 13.4 
B) 32.8 
C) 16.6 
D) 24.4 
A) 13.4 
B) 32.8 
C) 16.6 
D) 24.4

Question 10

A slot machine:

Accepted Answer

A) is not an unfair bet. 
B) is a proof that people are generally risk- loving. 
C) is a proof that people are irrational. 
D) gives a better average return than a state lottery. 
A) is not an unfair bet. 
B) is a proof that people are generally risk- loving. 
C) is a proof that people are irrational. 
D) gives a better average return than a state lottery.

Question 11

When individuals are risk- averse:

Accepted Answer

A) they stay away from slot machines. 
B) they avoid entering economic exchanges. 
C) they never deal with risk- lovers. 
D) they find ways to eliminate risk. 
A) they stay away from slot machines. 
B) they avoid entering economic exchanges. 
C) they never deal with risk- lovers. 
D) they find ways to eliminate risk.

Question 12

Lotteries are a form of gambling with an expected payoff of less than one. yet we often see that winners of very large prices bought their tickets as a group. Why does this seem contradictory?

Accepted Answer

Only a risk lover would accept a pure be

Question 13

Will is playing on a game show. He must choose between two offers. The first offer is a payment of $2000, which he can take for simply being on the show, or he can enter a gamble. In the gamble, he chooses one of two curtains that conceal two items. He makes a draw for curtain one or two, from a hat; he receives the gift behind the curtain picked. He knows that behind one curtain is an automobile valued at $4000 and behind other curtain is a set of encyclopedias valued at $500. If his initial wealth is $1000 and his utility function can be described by U(w)= 1 - 1000/w, then what must be the probability of drawing the car for Will to be indifferent between the two choices?

Accepted Answer

For Will to be indifferent between the t

Question 14

State- dependent preferences depend on:

Accepted Answer

A) state income tax laws. 
B) subjective probabilities. 
C) observed probabilities. 
D) perfect information. 
A) state income tax laws. 
B) subjective probabilities. 
C) observed probabilities. 
D) perfect information.

Question 15

If an individual prefers a risky prospect to a sure prospect then:

Accepted Answer

A) the two prospects must have the same expected value. 
B) the risky prospect has a higher expected utility. 
C) the individual is irrational. 
D) the individual is risk lover. 
A) the two prospects must have the same expected value. 
B) the risky prospect has a higher expected utility. 
C) the individual is irrational. 
D) the individual is risk lover.

Question 16

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1 and U(1000)= 0, what is U(2000)?

Accepted Answer

A) depends on the specific person involved 
B) 0.25 
C) 0.75 
D) 0.50 
A) depends on the specific person involved 
B) 0.25 
C) 0.75 
D) 0.50

Question 17

A risk- averse individual will:

Accepted Answer

A) always enter a risky venture over a particularly risky prospect. 
B) enter a risky venture as long as expected utility increases. 
C) prefer all certain prospects over a particularly risky prospect. 
D) never play a slot machine. 
A) always enter a risky venture over a particularly risky prospect. 
B) enter a risky venture as long as expected utility increases. 
C) prefer all certain prospects over a particularly risky prospect. 
D) never play a slot machine.

Question 18

The validity of the expected utility hypothesis requires that:

Accepted Answer

A) individuals carry out compound probability calculations. 
B) individuals are risk- averse. 
C) the continuity assumption is met. 
D) preference orderings over riskless prospects are independent of the state that occurs. 
A) individuals carry out compound probability calculations. 
B) individuals are risk- averse. 
C) the continuity assumption is met. 
D) preference orderings over riskless prospects are independent of the state that occurs.

Question 19

Benny is a expected utility maximizer with a well- behaved, continuously differentiable utility function (i.e., no kinks or inflection points).
i)Benny is presented with the following choices:
A. $1,000 for sure
B. 50% chance of $800 and 50% chance of $1,500
C. $500 for sure
D. 50% chance of $400 and 50% chance of $900
Benny is indifferent between A and B and is also indifferent between C and D. (Note: this does not imply that he is indifferent between A and C or B and D.)
Is Benny risk neutral, risk averse, risk loving, or can't you tell? Explain.
ii)He is now faced with the following choice:
E. $750 for sure
F. 25% chance of $400 and 25% chance of $900 and 25% chance of $800 and 25% chance of $1,500. Will Benny choose E or F, or is he indifferent between them, or is not possible to tell?

Accepted Answer

i)Both of the risky choices (B and D)hav

Question 20

If an individual is risk averse, then:

Accepted Answer

A) any allocation of risk is optimal. 
B) that person will always consume in a corner. 
C) that person will want to buy insurance at any price. 
D) that person may at times accept a bet. 
A) any allocation of risk is optimal. 
B) that person will always consume in a corner. 
C) that person will want to buy insurance at any price. 
D) that person may at times accept a bet.

Which of the following represents the utility function of a risk lover?

The reservation demand price for insurance is:

The effort of carrying an umbrella reduces my utility by 1/2 a unit. If it rains and I have no umbrella, my utility falls by 3 units, whilst it only falls by 1 unit if I do have an umbrella. I consider that the probability it will rain is 1/2.Therefore I carry an umbrella.

An individual is said to be risk- averse if:

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1, U(1000)= 0, and U(2000)=5/8. What is the correct preference ranking?

The expected utility hypothesis requires all of the assumptions used to study utility under certainty and all of the following except:

Consider the following prospects, in which w₁> w₂> w₃; a: (1/3, 1/3, 1/3: w₁, w₂, w₃); b: (1/4, 1/2, 1/4: w₁, w₂, w₃); and c: (0, 1, 0: w₁, w₂, w₃). Shelly reports that a is preferred to b, and that c is preferred to a.

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 is able to buy an insurance policy to cover her bracelet against theft. How much would she be willing to pay for the insurance?

A slot machine:

When individuals are risk- averse:

Lotteries are a form of gambling with an expected payoff of less than one. yet we often see that winners of very large prices bought their tickets as a group. Why does this seem contradictory?

State- dependent preferences depend on:

If an individual prefers a risky prospect to a sure prospect then:

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1 and U(1000)= 0, what is U(2000)?

A risk- averse individual will:

The validity of the expected utility hypothesis requires that:

If an individual is risk averse, then:

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

Which of the following represents the utility function of a risk lover?

The reservation demand price for insurance is:

The effort of carrying an umbrella reduces my utility by 1/2 a unit. If it rains and I have no umbrella, my utility falls by 3 units, whilst it only falls by 1 unit if I do have an umbrella. I consider that the probability it will rain is 1/2.Therefore I carry an umbrella.

An individual is said to be risk- averse if:

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1, U(1000)= 0, and U(2000)=5/8. What is the correct preference ranking?

The expected utility hypothesis requires all of the assumptions used to study utility under certainty and all of the following except:

Consider the following prospects, in which w1 > w2 > w3; a: (1/3, 1/3, 1/3: w1, w2, w3); b: (1/4, 1/2, 1/4: w1, w2, w3); and c: (0, 1, 0: w1, w2, w3). Shelly reports that a is preferred to b, and that c is preferred to a.

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 is able to buy an insurance policy to cover her bracelet against theft. How much would she be willing to pay for the insurance?

A slot machine:

When individuals are risk- averse:

Lotteries are a form of gambling with an expected payoff of less than one. yet we often see that winners of very large prices bought their tickets as a group. Why does this seem contradictory?

State- dependent preferences depend on:

If an individual prefers a risky prospect to a sure prospect then:

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1 and U(1000)= 0, what is U(2000)?

A risk- averse individual will:

The validity of the expected utility hypothesis requires that:

If an individual is risk averse, then:

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

Consider the following prospects, in which w₁> w₂> w₃; a: (1/3, 1/3, 1/3: w₁, w₂, w₃); b: (1/4, 1/2, 1/4: w₁, w₂, w₃); and c: (0, 1, 0: w₁, w₂, w₃). Shelly reports that a is preferred to b, and that c is preferred to a.

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 is able to buy an insurance policy to cover her bracelet against theft. How much would she be willing to pay for the insurance?