Question 1

Risk- pooling:

Accepted Answer

A) is rarely witnessed among close- knit communities. 
B) and risk- sharing are essentially identical mechanisms. 
C) is a form of insurance. 
D) is not relevant for a fishing party. 
A) is rarely witnessed among close- knit communities. 
B) and risk- sharing are essentially identical mechanisms. 
C) is a form of insurance. 
D) is not relevant for a fishing party.

Question 2

If one's indifference curves in a state space graph are convex to the origin, the individual is:

Accepted Answer

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

Question 3

Consider these four choices: A. $1,000,000 for sure
B. 10 chance of $5,000,000 and .89 chance of $1,000,000 and .01 chance of $0
C. 10 chance of $5,000,000 and .90 chance of $0
D. 11 chance of $1,000,000 and .89 chance of $0
It is commonly observed that people prefer A to B, and prefer C to D. Show that this pair of choices is inconsistent with expected utility maximization.

Accepted Answer

A preferred to B implies that u(1000000)

Question 4

If a person is risk averse:

Accepted Answer

A) the certainty equivalent of a gamble is equal to the expected value of the gamble. 
B) the certainty equivalent of a gamble is lower than the expected value of the gamble. 
C) the certainty equivalent of a gamble is higher than the expected value of the gamble. 
D) cannot be compared to the expected value of the gamble. 
A) the certainty equivalent of a gamble is equal to the expected value of the gamble. 
B) the certainty equivalent of a gamble is lower than the expected value of the gamble. 
C) the certainty equivalent of a gamble is higher than the expected value of the gamble. 
D) cannot be compared to the expected value of the gamble.

Question 5

Consumers buy insurance because:

Accepted Answer

A) it increases their expected utility. 
B) it decreases their current cost of living. 
C) advertising overestimates the risks they face. 
D) sales people will not leave without a deal. 
A) it increases their expected utility. 
B) it decreases their current cost of living. 
C) advertising overestimates the risks they face. 
D) sales people will not leave without a deal.

Question 6

The market for insurance:

Accepted Answer

A) is a risk- pooling arrangement. 
B) needs risk- lovers to buy policies in order to be viable. 
C) exists only of insurance firms are risk- lovers. 
D) does not need the law of large numbers to operate. 
A) is a risk- pooling arrangement. 
B) needs risk- lovers to buy policies in order to be viable. 
C) exists only of insurance firms are risk- lovers. 
D) does not need the law of large numbers to operate.

Question 7

A card game:

Accepted Answer

A) is characterized by asymmetric information. 
B) isn't much joy for risk- averse individuals. 
C) cannot be analyzed using game theory. 
D) has no risk if bets are not made. 
A) is characterized by asymmetric information. 
B) isn't much joy for risk- averse individuals. 
C) cannot be analyzed using game theory. 
D) has no risk if bets are not made.

Question 8

Which of the following assumptions concerning individual behaviour in risky situations guarantees that individuals will be willing to make trade offs between risky and riskless prospects?

Accepted Answer

A) the continuity assumption 
B) the substitution assumption 
C) the ordering assumption 
D) the transitivity assumption 
A) the continuity assumption 
B) the substitution assumption 
C) the ordering assumption 
D) the transitivity assumption

Question 9

Risk pooling is most likely to be found among people who:

Accepted Answer

A) avoid risk. 
B) are indifferent to risk. 
C) prefer risk. 
D) live in primitive cultures. 
A) avoid risk. 
B) are indifferent to risk. 
C) prefer risk. 
D) live in primitive cultures.

Question 10

Expected values are found by:

Accepted Answer

A) public opinion surveys. 
B) introspection about the future. 
C) discovering the opportunity cost of risk. 
D) calculating weighted averages. 
A) public opinion surveys. 
B) introspection about the future. 
C) discovering the opportunity cost of risk. 
D) calculating weighted averages.

Question 11

A compound prospect:

Accepted Answer

A) is the predicted interest rate for present value calculations. 
B) is the view from a millionaire's vacation compound. 
C) has a risky prospect as one of its outcomes. 
D) pays off over several periods at compound interest. 
A) is the predicted interest rate for present value calculations. 
B) is the view from a millionaire's vacation compound. 
C) has a risky prospect as one of its outcomes. 
D) pays off over several periods at compound interest.

Question 12

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

Accepted Answer

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

Question 13

Maria is planning a trip to Hawaii. The utility from the trip is a function of how much she spends on it (Y)given by U(Y)= log Y. Maria has $10,000 to spend on the trip. If she spends all of it, her utility will be: U(10000)= log(10000)= 4.
Suppose there is a 25 percent probability that Maria will lose $1000 of the cash on the trip. What is the maximum amount that Maria would be willing to pay to insure $1000?

Accepted Answer

EU(without insurance)= 3.9886.

Question 14

A certainty equivalent income:

Accepted Answer

A) means that there is some amount of income that one will accept with certainty rather than face a gamble. 
B) is an application of the continuity of preferences assumption. 
C) is calculated using the marginal utility of wealth. 
D) means that at high enough income levels there is always an amount of risk that makes one reject a gamble. 
A) means that there is some amount of income that one will accept with certainty rather than face a gamble. 
B) is an application of the continuity of preferences assumption. 
C) is calculated using the marginal utility of wealth. 
D) means that at high enough income levels there is always an amount of risk that makes one reject a gamble.

Question 15

The continuity assumption holds that consumers facing risky decisions:

Accepted Answer

A) can choose only if the values of outcomes are continuous. 
B) can be indifferent between a risky and a certain prospect. 
C) require only the assumptions required under certainty. 
D) prefer them to certain prospects. 
A) can choose only if the values of outcomes are continuous. 
B) can be indifferent between a risky and a certain prospect. 
C) require only the assumptions required under certainty. 
D) prefer them to certain prospects.

Question 16

Suppose a person must accept one of three bets:
A. 0.5 chance of winning $100 and 0.5 chance of losing $100.
B. 0.75 chance of winning $100 and 0.25 chance of losing $300.
C. 0.9 chance of winning $100 and 0.1 chance of losing $900. Show that all of these are fair bets.

Accepted Answer

EV(A)= .5(100)+ .5(-

Question 17

Which of the following individuals is likely to purchase insurance?

Accepted Answer

A) a risk neutral person when the insurance is over priced 
B) a risk lover when the insurance is underpriced 
C) a risk neutral person when the insurance is fairly priced 
D) a risk- averse person when the insurance is fairly priced 
A) a risk neutral person when the insurance is over priced 
B) a risk lover when the insurance is underpriced 
C) a risk neutral person when the insurance is fairly priced 
D) a risk- averse person when the insurance is fairly priced

Question 18

The maximum that a risk- averse individual is willing to pay for full- insurance coverage is:

Accepted Answer

A) the certainty equivalent. 
B) the value of the expected loss from a risky project. 
C) the difference between the expected and the certainty equivalent wealth. 
D) the difference between the initial and the certainty equivalent wealth. 
A) the certainty equivalent. 
B) the value of the expected loss from a risky project. 
C) the difference between the expected and the certainty equivalent wealth. 
D) the difference between the initial and the certainty equivalent wealth.

Question 19

A compound prospect can be defined as one which:

Accepted Answer

A) consists of risky outcomes discounted by a factor reflecting risk. 
B) has as one of its outcomes a riskless prospect. 
C) has as one of its outcomes another risky prospect. 
D) as one characterized by complexity. 
A) consists of risky outcomes discounted by a factor reflecting risk. 
B) has as one of its outcomes a riskless prospect. 
C) has as one of its outcomes another risky prospect. 
D) as one characterized by complexity.

Question 20

Al, a risk- averse expected- utility maximizer with utility over wealth given by U(W), has W0 dollars that he can save or invest in a risky asset. With probability p the rate of return on the asset is rg>0, and with probability 1 - p the rate of return on the asset is rb - aW. Show that the optimal choice of x does not depend on W0.

Accepted Answer

i)Al's wealth in state i if he invests x

Risk- pooling:

If one's indifference curves in a state space graph are convex to the origin, the individual is:

If a person is risk averse:

Consumers buy insurance because:

The market for insurance:

A card game:

Which of the following assumptions concerning individual behaviour in risky situations guarantees that individuals will be willing to make trade offs between risky and riskless prospects?

Risk pooling is most likely to be found among people who:

Expected values are found by:

A compound prospect:

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

A certainty equivalent income:

The continuity assumption holds that consumers facing risky decisions:

Suppose a person must accept one of three bets: A. 0.5 chance of winning $100 and 0.5 chance of losing $100. B. 0.75 chance of winning $100 and 0.25 chance of losing $300. C. 0.9 chance of winning $100 and 0.1 chance of losing $900. Show that all of these are fair bets.

Which of the following individuals is likely to purchase insurance?

The maximum that a risk- averse individual is willing to pay for full- insurance coverage is:

A compound prospect can be defined as one which:

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

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Exam 17: Choice Making Under Uncertainty

Risk- pooling:

If one's indifference curves in a state space graph are convex to the origin, the individual is:

If a person is risk averse:

Consumers buy insurance because:

The market for insurance:

A card game:

Which of the following assumptions concerning individual behaviour in risky situations guarantees that individuals will be willing to make trade offs between risky and riskless prospects?

Risk pooling is most likely to be found among people who:

Expected values are found by:

A compound prospect:

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

A certainty equivalent income:

The continuity assumption holds that consumers facing risky decisions:

Suppose a person must accept one of three bets: A. 0.5 chance of winning $100 and 0.5 chance of losing $100. B. 0.75 chance of winning $100 and 0.25 chance of losing $300. C. 0.9 chance of winning $100 and 0.1 chance of losing $900. Show that all of these are fair bets.

Which of the following individuals is likely to purchase insurance?

The maximum that a risk- averse individual is willing to pay for full- insurance coverage is:

A compound prospect can be defined as one which:

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