Question 1

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.​

Accepted Answer

A) True 
 B)False  False

Question 2

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Accepted Answer

A) True 
 B)False  False

Question 3

Scenario 27-1
​
Lisa has a utility function
 $$U = W ^ { 1 / 2 }$$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
​
-Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Accepted Answer

Yes, Lisa is risk averse. The utility Lisa gains from increasing her wealth by some amount is less than the utility she loses from decreasing her wealth by the same amount.

Question 4

Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work.

Accepted Answer

Jack's should remodel. The pre

Question 5

Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

Accepted Answer

With a 7% interest rate the rule of 70 i

Question 6

Which of the following actions best illustrates moral hazard?

Accepted Answer

A) Hannah knows she is a reckless driver and so she applies for automobile insurance. 
B) A person is unwilling to buy a stock when she believes its price has an equal change of rising or falling $10. 
C) Morgan dislikes losing $400 more than he likes winning $400. 
D) When you rent a car, you treat it with less care than you would if it were your own. 
A) Hannah knows she is a reckless driver and so she applies for automobile insurance. 
B) A person is unwilling to buy a stock when she believes its price has an equal change of rising or falling $10. 
C) Morgan dislikes losing $400 more than he likes winning $400. 
D) When you rent a car, you treat it with less care than you would if it were your own.

Question 7

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

Accepted Answer

A) 5 percent 
B) 6 percent 
C) 7 percent 
D) 8 percent 
A) 5 percent 
B) 6 percent 
C) 7 percent 
D) 8 percent

Question 8

If Alan is risk-averse, then he will always

Accepted Answer

A) choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B) choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C) choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D) choose to play a game where he has a 25 percent chance of winning $5 and a 75 percent chance of losing $5. 
A) choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B) choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C) choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D) choose to play a game where he has a 25 percent chance of winning $5 and a 75 percent chance of losing $5.

Question 9

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Accepted Answer

The presen

Question 10

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Accepted Answer

A) Both Irene's and Victor's 
B) Irene's but not Victor's 
C) Victor's but not Irene's 
D) Neither Victor's nor Irene's 
A) Both Irene's and Victor's 
B) Irene's but not Victor's 
C) Victor's but not Irene's 
D) Neither Victor's nor Irene's

Question 11

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

A) True 
 B)False

Question 12

If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

Approximat

Question 13

Morgan decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Morgan probably believes that

Accepted Answer

A) stock prices do not follow a random walk. 
B) the stock market is not informationally efficient. 
C) stock market irrationality exists. 
D) it is better to own stock in 23 companies than it is to own stock in 3 companies. 
A) stock prices do not follow a random walk. 
B) the stock market is not informationally efficient. 
C) stock market irrationality exists. 
D) it is better to own stock in 23 companies than it is to own stock in 3 companies.

Question 14

For a risk averse person,

Accepted Answer

A) the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C) the utility function exhibits the property of increasing marginal utility of wealth. 
D) the utility function exhibits the property of constant marginal utility of wealth. 
A) the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C) the utility function exhibits the property of increasing marginal utility of wealth. 
D) the utility function exhibits the property of constant marginal utility of wealth.

Question 15

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that

Question 16

Write the formula to find the present value of $x to be paid in n years.

Accepted Answer

The answer of Write the formula to find the present...

Question 17

Tyler put $430 in the bank one year ago and forgot about it. Today, the bank sent Tyler a statement indicating that he now has $442.90 in his account. What interest rate did Tyler earn?

Accepted Answer

A) 2 percent 
B) 4 percent 
C) 3 percent 
D) 1 percent 
A) 2 percent 
B) 4 percent 
C) 3 percent 
D) 1 percent

Question 18

Diversification cannot reduce market risk.

Accepted Answer

A) True 
 B)False

Question 19

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Accepted Answer

The answer of Write the formula to find the present...

Question 20

Risk-averse persons will take no risks.

Accepted Answer

A) True 
 B)False

Exam 27: Tools of Finance

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.​

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Scenario 27-1 ​ Lisa has a utility function U=W1/2U = W ^ { 1 / 2 }U=W1/2 where W is Lisa's wealth in millions of dollars and U is the utility she obtains. ​ -Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

Which of the following actions best illustrates moral hazard?

If Alan is risk-averse, then he will always

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Risk aversion simply means that people dislike bad things to happen.

If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

Morgan decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Morgan probably believes that

For a risk averse person,

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Write the formula to find the present value of $x to be paid in n years.

Tyler put $430 in the bank one year ago and forgot about it. Today, the bank sent Tyler a statement indicating that he now has $442.90 in his account. What interest rate did Tyler earn?

Diversification cannot reduce market risk.

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Risk-averse persons will take no risks.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.

Scenario 27-1 Lisa has a utility function $U = W ^ { 1 / 2 }$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Is Lisa risk averse? Explain.