Question 1

Two possible events are independent if they happen at different times and in different places.True

Accepted Answer

A) True 
 B)False

Question 2

(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility.Natasha earns $50,000
Per year but faces losing $20,000 of it if she is late with her work.If there is a 25% probability that Natasha will be late with her work and her income will equal $30,000, Natasha would be willing to pay for insurance to eliminate the uncertainty in her income.Natasha wants
A guaranteed income of $50,000.

Accepted Answer

A) $4,000 
B) $5,000 
C) $7,500 
D) $9,500 
A) $4,000 
B) $5,000 
C) $7,500 
D) $9,500

Question 3

Which of the following is a limit to the ability of diversification to reduce risk?

Accepted Answer

A) losses due to bad decision making 
B) key raw materials 
C) industrial life cycles 
D) economic losses from bad weather 
A) losses due to bad decision making 
B) key raw materials 
C) industrial life cycles 
D) economic losses from bad weather

Question 4

If a person who is willing to pay an insurance premium to lessen financial risk is said to be:

Accepted Answer

A) a moral hazard. 
B) risk-loving. 
C) risk-averse. 
D) risk-neutral. 
A) a moral hazard. 
B) risk-loving. 
C) risk-averse. 
D) risk-neutral.

Question 5

Scenario: Diversification Morris is considering investing $10,000 in a sunglass company or a rain poncho company.If it is a rainy year and he invests only in the sunglass company, he expects to lose $5,000 at the end of the year.However, if it is a rainy year and he invests only in the rain poncho company, he expects to earn $10,000.If it is a sunny year and he invests only in the sunglass company, he expects to earn $10,000 at the end of the year; if he invests only in the rain poncho company, he expects to lose $5,000 in a sunny year.There is a 50% chance of a sunny year and a 50%
Chance of a rainy year.
(Scenario: Diversification) Based on the information in the scenario Diversification, if Morris invests half of his money in the sunglass company and half in the rain poncho company, what is his expected gain or loss?

Accepted Answer

A) a loss of $2,500 
B) to break even 
C) a gain of $2,500 
D) a gain of $10,000 
A) a loss of $2,500 
B) to break even 
C) a gain of $2,500 
D) a gain of $10,000

Question 6

Two individuals make up the auto insurance market.Bonnie drives well, and the probability of her having an accident is 10% this year.Lisa also drives carefully, and her probability of having an accident is 5%.What is the probability that Bonnie and Lisa will both have accidents this year?

Accepted Answer

A) 0.15% 
B) 0.75% 
C) 0.005% 
D) 0.5% 
A) 0.15% 
B) 0.75% 
C) 0.005% 
D) 0.5%

Question 7

You go into a grocery store to buy a soft drink.You find that different brands or varieties have different prices, e.g., for a one-liter bottle, Coke costs $1, Pepsi costs $0.95, ginger ale costs
$1.05.The price of a one-liter bottle of a soft drink is therefore a random variable.True

Accepted Answer

A) True 
 B)False

Question 8

(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility.Natasha earns $50,000
Per year but faces losing $20,000 of it if she is late with her work.If there is a 25% probability that Natasha will be late with her work and her income will then equal $30,000, her expected income is:

Accepted Answer

A) $32,500. 
B) $38,200. 
C) $40,500. 
D) $45,000. 
A) $32,500. 
B) $38,200. 
C) $40,500. 
D) $45,000.

Question 9

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

Accepted Answer

A) a major recession in Western Europe and the United States. 
B) terror attacks by the IRA. 
C) asbestos claims. 
D) the war in Iraq. 
A) a major recession in Western Europe and the United States. 
B) terror attacks by the IRA. 
C) asbestos claims. 
D) the war in Iraq.

Question 10

Suppose that an individual is risk-averse.If this individual's utility function is depicted in a graph, with income measured on the horizontal axis and "utils" on the vertical axis, the graph would be an upward-sloping:

Accepted Answer

A) straight line through the origin. 
B) straight line with a positive vertical intercept. 
C) curve with a steadily increasing slope (i.e., a curve that is convex from below). 
D) curve with a steadily decreasing slope (i.e., a curve that is concave from below). 
A) straight line through the origin. 
B) straight line with a positive vertical intercept. 
C) curve with a steadily increasing slope (i.e., a curve that is convex from below). 
D) curve with a steadily decreasing slope (i.e., a curve that is concave from below).

Question 11

Solutions to the problems created by moral hazard include:

Accepted Answer

A) offering salespeople in stores a straight salary rather than a commission on sales. 
B) setting up many stores and restaurants that are part of a national chain as franchises, with the owner undertaking quite a lot of risk. 
C) allowing property owners to overinsure their buildings. 
D) diversification. 
A) offering salespeople in stores a straight salary rather than a commission on sales. 
B) setting up many stores and restaurants that are part of a national chain as franchises, with the owner undertaking quite a lot of risk. 
C) allowing property owners to overinsure their buildings. 
D) diversification.

Question 12

(Table: Income and Utility for Tyler) The table Income and Utility for Tyler shows the utility Tyler receives at various income levels, but she does not know what her income will be next year.There is a 40% chance her income will be $20,000, a 40% chance her income will be
$30,000, and a 20% chance her income will be $40,000.What level of certain income gives her the same utility as her expected utility, given the uncertainty?

Accepted Answer

A) $28,000 
B) $25,000 
C) $26,516 
D) $29,000 
A) $28,000 
B) $25,000 
C) $26,516 
D) $29,000

Question 13

Through insurance and other devices, the modern economy offers many ways for individuals to reduce their exposure to risk.False

Accepted Answer

A) True 
 B)False

Question 14

Risk-averse individuals are willing to pay a premium that is their expected claims.

Accepted Answer

A) less than 
B) greater than or equal to 
C) equal to 
D) dependent on something other than 
A) less than 
B) greater than or equal to 
C) equal to 
D) dependent on something other than

Question 15

Warranties that cover the cost of a repair or replacement will:

Accepted Answer

A) decrease the consumer's expected utility from consuming the good. 
B) increase the consumer's expected utility from consuming the good. 
C) have no impact on the consumer's expected utility from consuming the good. 
D) reverse the diminishing marginal utility that a consumer experiences. 
A) decrease the consumer's expected utility from consuming the good. 
B) increase the consumer's expected utility from consuming the good. 
C) have no impact on the consumer's expected utility from consuming the good. 
D) reverse the diminishing marginal utility that a consumer experiences.

Question 16

(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim.Rahim's expected utility from income is:

Accepted Answer

A) 3,500 utils. 
B) 10,000 utils. 
C) 3,104 utils. 
D) Utility cannot be determined from the information given. 
A) 3,500 utils. 
B) 10,000 utils. 
C) 3,104 utils. 
D) Utility cannot be determined from the information given.

Question 17

Domingo has a total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash.He keeps the cash in a safe deposit box, so that it is completely safe.However, there is a 10% chance that his house will burn down by the end of the year and be worth nothing (and a 90% chance that nothing will happen to it).Without insurance, the expected value of his end-of-year wealth is:

Accepted Answer

A) $410,000. 
B) $450,000. 
C) $490,000. 
D) $485,000. 
A) $410,000. 
B) $450,000. 
C) $490,000. 
D) $485,000.

Question 18

(Table: Crop Income) Brent is a farmer, and the income from his crop is dependent upon the weather during the growing season.The table Crop Income shows the income and utility he will receive under various growing conditions and the probability that each condition will occur.a) Calculate Brent's expected income.b) Calculate Brent's expected utility.

Accepted Answer

a) Expected income = 0.25 × $0

Question 19

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills.The $7,300 represents Darnell's:

Accepted Answer

A) risk. 
B) marginal utility. 
C) expected utility. 
D) premium. 
A) risk. 
B) marginal utility. 
C) expected utility. 
D) premium.

Question 20

The strategy of investing in several assets so that any possible losses are independent events is referred to as:

Accepted Answer

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

Two possible events are independent if they happen at different times and in different places.True

Which of the following is a limit to the ability of diversification to reduce risk?

If a person who is willing to pay an insurance premium to lessen financial risk is said to be:

Two individuals make up the auto insurance market.Bonnie drives well, and the probability of her having an accident is 10% this year.Lisa also drives carefully, and her probability of having an accident is 5%.What is the probability that Bonnie and Lisa will both have accidents this year?

You go into a grocery store to buy a soft drink.You find that different brands or varieties have different prices, e.g., for a one-liter bottle, Coke costs $1, Pepsi costs $0.95, ginger ale costs $1.05.The price of a one-liter bottle of a soft drink is therefore a random variable.True

(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility.Natasha earns $50,000 Per year but faces losing $20,000 of it if she is late with her work.If there is a 25% probability that Natasha will be late with her work and her income will then equal $30,000, her expected income is:

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

Suppose that an individual is risk-averse.If this individual's utility function is depicted in a graph, with income measured on the horizontal axis and "utils" on the vertical axis, the graph would be an upward-sloping:

Solutions to the problems created by moral hazard include:

Through insurance and other devices, the modern economy offers many ways for individuals to reduce their exposure to risk.False

Risk-averse individuals are willing to pay a premium that is their expected claims.

Warranties that cover the cost of a repair or replacement will:

(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim.Rahim's expected utility from income is:

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills.The $7,300 represents Darnell's:

The strategy of investing in several assets so that any possible losses are independent events is referred to as:

First Principles

Economic Models: Trade-Offs and Trade

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Filters

Exam 20: Uncertainty, Risk, and Private Information

Two possible events are independent if they happen at different times and in different places.True

Which of the following is a limit to the ability of diversification to reduce risk?

If a person who is willing to pay an insurance premium to lessen financial risk is said to be:

Two individuals make up the auto insurance market.Bonnie drives well, and the probability of her having an accident is 10% this year.Lisa also drives carefully, and her probability of having an accident is 5%.What is the probability that Bonnie and Lisa will both have accidents this year?

You go into a grocery store to buy a soft drink.You find that different brands or varieties have different prices, e.g., for a one-liter bottle, Coke costs $1, Pepsi costs $0.95, ginger ale costs $1.05.The price of a one-liter bottle of a soft drink is therefore a random variable.True

(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility.Natasha earns $50,000 Per year but faces losing $20,000 of it if she is late with her work.If there is a 25% probability that Natasha will be late with her work and her income will then equal $30,000, her expected income is:

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

Suppose that an individual is risk-averse.If this individual's utility function is depicted in a graph, with income measured on the horizontal axis and "utils" on the vertical axis, the graph would be an upward-sloping:

Solutions to the problems created by moral hazard include:

Through insurance and other devices, the modern economy offers many ways for individuals to reduce their exposure to risk.False

Risk-averse individuals are willing to pay a premium that is their expected claims.

Warranties that cover the cost of a repair or replacement will:

(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim.Rahim's expected utility from income is:

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills.The $7,300 represents Darnell's:

The strategy of investing in several assets so that any possible losses are independent events is referred to as:

First Principles

Economic Models: Trade-Offs and Trade

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Filters