Question 1

For most families, total utility does not:

Accepted Answer

A) rise as income rises. 
B) rise less quickly as income increases. 
C) show increasing marginal utility. 
D) show diminishing marginal utility. 
A) rise as income rises. 
B) rise less quickly as income increases. 
C) show increasing marginal utility. 
D) show diminishing marginal utility.

Question 2

Jaleh has just landed a great job and plans to buy a fancy car worth $100,000.Jaleh is
risk-averse, but she likes to drive fast, so the probability that she wrecks and totals the car (a total loss of $100,000) is 0.1.The probability that she has no accidents is 0.9.If an insurance company were to offer Jaleh a fair insurance policy that completely replaced her car, how much would she pay? What is the most she would pay for an insurance policy that would completely replace her car if she totaled it?

Accepted Answer

The fair insurance policy premium is equ

Question 3

(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses.The Smith family's expected total utility is utils.

Accepted Answer

A) 4,175 
B) 3,700 
C) 3,620 
D) 3,210 
A) 4,175 
B) 3,700 
C) 3,620 
D) 3,210

Question 4

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 all of his money 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 5

A random variable has an uncertain present value.True

Accepted Answer

A) True 
 B)False

Question 6

An efficient allocation of risk occurs when those most willing to bear risk put their capital at risk to insure those who are least willing to bear risk.False

Accepted Answer

A) True 
 B)False

Question 7

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose the probability that the sitcom does not make it to television is 50%, that it makes it to television but is not the most viewed show in its time slot is 30%, and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information, Norman's expected total utility is utils.

Accepted Answer

A) 2,000 
B) 2,150 
C) 2,350 
D) 2,650 
A) 2,000 
B) 2,150 
C) 2,350 
D) 2,650

Question 8

The problem of adverse selection:

Accepted Answer

A) occurs when sellers (who know more about the quality of what they are selling than buyers) deliberately select inferior products to sell. 
B) is also referred to as the moral hazard problem. 
C) can result in an overall increase in the gains from trade. 
D) occurs when an employer fires the wrong person. 
A) occurs when sellers (who know more about the quality of what they are selling than buyers) deliberately select inferior products to sell. 
B) is also referred to as the moral hazard problem. 
C) can result in an overall increase in the gains from trade. 
D) occurs when an employer fires the wrong person.

Question 9

You own a shoe store and need to hire a new sales associate.You have a large stack of applications, but unfortunately you have no idea who is a strong salesperson and who is a weak one.What kind of problem are you facing and how can you solve it?

Accepted Answer

This is a moral hazard problem.Each work

Question 10

Which of the following regarding a warranty is not true?

Accepted Answer

A) It is a form of consumer insurance. 
B) Consumers may buy one even if the cost of the warranty is greater than the expected future claim paid by the manufacturer. 
C) It decreases the consumer's expected utility from an item. 
D) It signals to consumers that the goods are of high quality. 
A) It is a form of consumer insurance. 
B) Consumers may buy one even if the cost of the warranty is greater than the expected future claim paid by the manufacturer. 
C) It decreases the consumer's expected utility from an item. 
D) It signals to consumers that the goods are of high quality.

Question 11

(Table: Utility for Terri and Mary) Terri and Mary are two consumers, each having an income of $300.The table Utility for Terri and Mary shows the marginal utility that each consumer would receive at various levels above and below their income.Based upon this table, is
More risk-averse because ________ has a drop in total utility if income were to fall
By $100.

Accepted Answer

A) Mary; Mary; larger 
B) Terri; Mary; larger 
C) Mary; Terri; smaller 
D) Terri; Terri; larger 
A) Mary; Mary; larger 
B) Terri; Mary; larger 
C) Mary; Terri; smaller 
D) Terri; Terri; larger

Question 12

The Conduire family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: state 1, in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000; and state 2, in which their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000.The probability of occurrence is 0.5 for each state.They can buy insurance that will cover the full cost of repairs for $5,000.If the Conduires are risk-averse and maximize their expected utility:

Accepted Answer

A) they will buy the insurance. 
B) they will be indifferent between buying and not buying the insurance, since their expected income for purchasing other goods and services is $45,000 regardless of what they do. 
C) they will not buy the insurance, since buying it does not increase their expected income for purchasing other goods and services. 
D) they will put $10,000 in savings to pay for any required repairs and not buy insurance. 
A) they will buy the insurance. 
B) they will be indifferent between buying and not buying the insurance, since their expected income for purchasing other goods and services is $45,000 regardless of what they do. 
C) they will not buy the insurance, since buying it does not increase their expected income for purchasing other goods and services. 
D) they will put $10,000 in savings to pay for any required repairs and not buy insurance.

Question 13

Individuals differ in risk aversion for which of the following reasons?

Accepted Answer

A) adverse selection 
B) moral hazard 
C) differences in income or wealth 
D) differences in their insurance 
A) adverse selection 
B) moral hazard 
C) differences in income or wealth 
D) differences in their insurance

Question 14

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose the probability that the sitcom does not make it to television is 60%, that it makes it to television but is not the most viewed show in its time slot is 30%, and that it makes it to television and is the most viewed show in its time slot is 10%.As a utility maximizer, Norman:

Accepted Answer

A) should keep his teaching job. 
B) should quit his teaching job and go to Hollywood. 
C) will be indifferent between leaving and staying, because his expected income is the same whether he stays a teacher or moves to Hollywood. 
D) will be indifferent between leaving and staying, because his expected total utility is the same whether he stays a teacher or moves to Hollywood. 
A) should keep his teaching job. 
B) should quit his teaching job and go to Hollywood. 
C) will be indifferent between leaving and staying, because his expected income is the same whether he stays a teacher or moves to Hollywood. 
D) will be indifferent between leaving and staying, because his expected total utility is the same whether he stays a teacher or moves to Hollywood.

Question 15

Moral hazard:

Accepted Answer

A) increases the ability of markets to allocate risk efficiently. 
B) decreases the ability of markets to allocate risk efficiently. 
C) has no impact on the ability of markets to allocate risk efficiently. 
D) encourages the provision of 100% insurance coverage. 
A) increases the ability of markets to allocate risk efficiently. 
B) decreases the ability of markets to allocate risk efficiently. 
C) has no impact on the ability of markets to allocate risk efficiently. 
D) encourages the provision of 100% insurance coverage.

Question 16

Organized gambling venues such as those at Las Vegas tend to attract:

Accepted Answer

A) risk-loving individuals only. 
B) even risk-averse people because they are designed to allow individuals to win. 
C) people who may be irrational in their choice of gambling and are often risk-averse. 
D) only professional gamblers. 
A) risk-loving individuals only. 
B) even risk-averse people because they are designed to allow individuals to win. 
C) people who may be irrational in their choice of gambling and are often risk-averse. 
D) only professional gamblers.

Question 17

Scenario: Flood Area Suppose you own a home that is estimated to be worth $250,000.You live in a potential flood area; as a result, the probability that you will lose your home to a flood is 30%.
(Scenario: Flood Area) Look at the scenario Flood Area.A flood may occur, causing you to
Lose your entire home.In this case, your expected loss resulting from the flood would be:

Accepted Answer

A) $250,000. 
B) $75,000. 
C) $15,000. 
D) $100,000. 
A) $250,000. 
B) $75,000. 
C) $15,000. 
D) $100,000.

Question 18

The marginal utility of income for a risk-averse individual will be:

Accepted Answer

A) constant. 
B) diminishing. 
C) increasing. 
D) unknown; the answer depends on the value of income. 
A) constant. 
B) diminishing. 
C) increasing. 
D) unknown; the answer depends on the value of income.

Question 19

Figure: Differences in Risk Aversion     (Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion.An important reason Ernest and Salvatore may differ in their aversion to risk is that they may differ in:

Accepted Answer

A) how their marginal utility is affected by income. 
B) their understanding of risk. 
C) their initial wealth holding or initial income level. 
D) how their marginal utility is affected by income and in their initial wealth holding or initial income level. 
A) how their marginal utility is affected by income. 
B) their understanding of risk. 
C) their initial wealth holding or initial income level. 
D) how their marginal utility is affected by income and in their initial wealth holding or initial income level.

Question 20

Which of the following is one of the principles on which the insurance industry rests?

Accepted Answer

A) Trade in risk can produce mutual gains. 
B) Diversification can increase risk. 
C) Deductibles add to the problem of moral hazard. 
D) There are no principles in the insurance industry. 
A) Trade in risk can produce mutual gains. 
B) Diversification can increase risk. 
C) Deductibles add to the problem of moral hazard. 
D) There are no principles in the insurance industry.

For most families, total utility does not:

(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses.The Smith family's expected total utility is utils.

A random variable has an uncertain present value.True

An efficient allocation of risk occurs when those most willing to bear risk put their capital at risk to insure those who are least willing to bear risk.False

The problem of adverse selection:

You own a shoe store and need to hire a new sales associate.You have a large stack of applications, but unfortunately you have no idea who is a strong salesperson and who is a weak one.What kind of problem are you facing and how can you solve it?

Which of the following regarding a warranty is not true?

Individuals differ in risk aversion for which of the following reasons?

Moral hazard:

Organized gambling venues such as those at Las Vegas tend to attract:

The marginal utility of income for a risk-averse individual will be:

Figure: Differences in Risk Aversion (Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion.An important reason Ernest and Salvatore may differ in their aversion to risk is that they may differ in:

Which of the following is one of the principles on which the insurance industry rests?

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

For most families, total utility does not:

(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses.The Smith family's expected total utility is utils.

A random variable has an uncertain present value.True

An efficient allocation of risk occurs when those most willing to bear risk put their capital at risk to insure those who are least willing to bear risk.False

The problem of adverse selection:

You own a shoe store and need to hire a new sales associate.You have a large stack of applications, but unfortunately you have no idea who is a strong salesperson and who is a weak one.What kind of problem are you facing and how can you solve it?

Which of the following regarding a warranty is not true?

Individuals differ in risk aversion for which of the following reasons?

Moral hazard:

Organized gambling venues such as those at Las Vegas tend to attract:

The marginal utility of income for a risk-averse individual will be:

Figure: Differences in Risk Aversion (Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion.An important reason Ernest and Salvatore may differ in their aversion to risk is that they may differ in:

Which of the following is one of the principles on which the insurance industry rests?

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