Question 1

For a given expected value, the smaller the standard deviation of the expected value, the larger the risk.

Accepted Answer

A) True 
 B)False

Question 2

With regards to an investment project, which of the following is TRUE?

Accepted Answer

A) A risk-neutral individual is more likely to invest than a risk-averse individual. 
B) A risk-neutral individual is more likely to invest than a risk-loving individual. 
C) A risk-neutral individual is less likely to invest than a risk-averse individual. 
D) Not enough information is given. 
A) A risk-neutral individual is more likely to invest than a risk-averse individual. 
B) A risk-neutral individual is more likely to invest than a risk-loving individual. 
C) A risk-neutral individual is less likely to invest than a risk-averse individual. 
D) Not enough information is given.

Question 3

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob is risk averse because

Accepted Answer

A) his utility function is convex. 
B) he has negative marginal utility of wealth. 
C) he is willing to pay a premium to avoid a risky situation. 
D) All of the above. 
A) his utility function is convex. 
B) he has negative marginal utility of wealth. 
C) he is willing to pay a premium to avoid a risky situation. 
D) All of the above.

Question 4

Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires)a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 50% chance that any variety will be retired. When Sarah buys her next stuffed animal, the expected value is

Accepted Answer

A) $50. 
B) $47.50. 
C) $45.00. 
D) $0. 
A) $50. 
B) $47.50. 
C) $45.00. 
D) $0.

Question 5

Explain why insurance companies usually do NOT offer earthquake insurance.

Accepted Answer

Insurance companies diversify their risk

Question 6

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Accepted Answer

A) True 
 B)False

Question 7

If an event is certain to occur, it has a probability (pr)of

Accepted Answer

A) 0. 
B) 0 < pr < 1. 
C) 1. 
D) Not enough information to determine. 
A) 0. 
B) 0 < pr < 1. 
C) 1. 
D) Not enough information to determine.

Question 8

Someone who is risk preferring has

Accepted Answer

A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk neutral. 
A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk neutral.

Question 9

A risk-neutral person will invest in a project by examining if

Accepted Answer

A) the expected utility associated with the project is positive. 
B) the marginal utility associated with the project is positive. 
C) the expected value is positive. 
D) All of the above. 
A) the expected utility associated with the project is positive. 
B) the marginal utility associated with the project is positive. 
C) the expected value is positive. 
D) All of the above.

Question 10

If your risk of losing your house to catastrophe is 25%, how much would fair insurance cost if your home were worth $1,000,000?

Accepted Answer

A) $250,000 
B) $750,000 
C) $1,000,000 
D) Unable to determine with the information given. 
A) $250,000 
B) $750,000 
C) $1,000,000 
D) Unable to determine with the information given.

Question 11

A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a red jelly bean next?

Accepted Answer

A) 20/40 
B) 20/60 
C) 40/60 
D) 0 
A) 20/40 
B) 20/60 
C) 40/60 
D) 0

Question 12

Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires)a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 25% chance that any variety will be retired. For the purchase of an individual animal, what is the value to Sarah of knowing ahead of time whether or not that variety will be retired?

Accepted Answer

If Sarah did not know whether a variety

Question 13

After Hurricane Katrina, there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage. What might explain these different approaches to insurance?

Accepted Answer

A) The risk of wind damage is potentially diversifiable, but the risk of flooding is not. 
B) The risk of flood damage is potentially diversifiable, but the risk of wind damage is not. 
C) predatory insurance policies 
D) Neither the risk of wind damage nor the risk of flooding is diversifiable. 
A) The risk of wind damage is potentially diversifiable, but the risk of flooding is not. 
B) The risk of flood damage is potentially diversifiable, but the risk of wind damage is not. 
C) predatory insurance policies 
D) Neither the risk of wind damage nor the risk of flooding is diversifiable.

Question 14

Risk-averse individuals make risky investments

Accepted Answer

A) never. 
B) when the investment's expected return exceeds the return on a non-risky investment. 
C) when the investment's expected return adequately compensates for the risk. 
D) only when they are feeling irrational. 
A) never. 
B) when the investment's expected return exceeds the return on a non-risky investment. 
C) when the investment's expected return adequately compensates for the risk. 
D) only when they are feeling irrational.

Question 15

Making many risky bets

Accepted Answer

A) reduces your expected value. 
B) is called risk-pooling and can reduce risk. 
C) is irrational. 
D) is called risk pooling and increases your expected value. 
A) reduces your expected value. 
B) is called risk-pooling and can reduce risk. 
C) is irrational. 
D) is called risk pooling and increases your expected value.

Question 16

If a person is risk averse, then she has negative marginal utility of wealth.

Accepted Answer

A) True 
 B)False

Question 17

A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is

Accepted Answer

A) 15.8. 
B) 249.50. 
C) 249.75. 
D) 499. 
A) 15.8. 
B) 249.50. 
C) 249.75. 
D) 499.

Question 18

According to the reflection effect,

Accepted Answer

A) people think harder about losses than about gains. 
B) people become more risk preferring over time. 
C) attitudes toward risk are reversed for gains versus losses. 
D) subjective probabilities on riskier outcomes are weighted heavier than on less risky outcomes. 
A) people think harder about losses than about gains. 
B) people become more risk preferring over time. 
C) attitudes toward risk are reversed for gains versus losses. 
D) subjective probabilities on riskier outcomes are weighted heavier than on less risky outcomes.

Question 19

If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?

Accepted Answer

A) 1/50 
B) 1/25 
C) 1/2 
D) 1 (100%) 
A) 1/50 
B) 1/25 
C) 1/2 
D) 1 (100%)

Question 20

If Stock A and Stock B both increase in value at the same time, they are

Accepted Answer

A) negatively correlated. 
B) uncorrelated. 
C) positively correlated. 
D) certain bets. 
A) negatively correlated. 
B) uncorrelated. 
C) positively correlated. 
D) certain bets.

For a given expected value, the smaller the standard deviation of the expected value, the larger the risk.

With regards to an investment project, which of the following is TRUE?

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob is risk averse because

Explain why insurance companies usually do NOT offer earthquake insurance.

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

If an event is certain to occur, it has a probability (pr)of

Someone who is risk preferring has

A risk-neutral person will invest in a project by examining if

If your risk of losing your house to catastrophe is 25%, how much would fair insurance cost if your home were worth $1,000,000?

A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a red jelly bean next?

After Hurricane Katrina, there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage. What might explain these different approaches to insurance?

Risk-averse individuals make risky investments

Making many risky bets

If a person is risk averse, then she has negative marginal utility of wealth.

A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is

According to the reflection effect,

If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?

If Stock A and Stock B both increase in value at the same time, they are

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters

Exam 14: Managerial Decision-Making Under Uncertainty

For a given expected value, the smaller the standard deviation of the expected value, the larger the risk.

With regards to an investment project, which of the following is TRUE?

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob is risk averse because

Explain why insurance companies usually do NOT offer earthquake insurance.

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

If an event is certain to occur, it has a probability (pr)of

Someone who is risk preferring has

A risk-neutral person will invest in a project by examining if

If your risk of losing your house to catastrophe is 25%, how much would fair insurance cost if your home were worth $1,000,000?

A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a red jelly bean next?

After Hurricane Katrina, there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage. What might explain these different approaches to insurance?

Risk-averse individuals make risky investments

Making many risky bets

If a person is risk averse, then she has negative marginal utility of wealth.

A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is

According to the reflection effect,

If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?

If Stock A and Stock B both increase in value at the same time, they are

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters