Question 1

A risk-preferring person is willing to pay

Accepted Answer

A) a risk premium. 
B) a fee to make a fair bet. 
C) to obtain decreasing marginal utility. 
D) None of the above. 
A) a risk premium. 
B) a fee to make a fair bet. 
C) to obtain decreasing marginal utility. 
D) None of the above.

Question 2

-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 will buy theft insurance to cover the full $100

Accepted Answer

A) as long as it does not cost more than $25. 
B) as long as it does not cost more than $50. 
C) as long as it does not cost more than $70. 
D) at any price. 
A) as long as it does not cost more than $25. 
B) as long as it does not cost more than $50. 
C) as long as it does not cost more than $70. 
D) at any price.

Question 3

If outcomes are ________, exactly one of the outcomes will occur and the probabilities add up to ________.

Accepted Answer

A) probabilistic; between 0 and 1 
B) exhaustive and mutually exclusive; 1 
C) exhaustive; 1 
D) mutually exclusive; between 0 and 1 
A) probabilistic; between 0 and 1 
B) exhaustive and mutually exclusive; 1 
C) exhaustive; 1 
D) mutually exclusive; between 0 and 1

Question 4

Many people do NOT fully insure against risk because

Accepted Answer

A) they are risk averse. 
B) the insurance companies are all crooks. 
C) the insurance offered is less than fair. 
D) the insurance offered is more than fair. 
A) they are risk averse. 
B) the insurance companies are all crooks. 
C) the insurance offered is less than fair. 
D) the insurance offered is more than fair.

Question 5

If global warming began to cause random world-wide damage to crops, insurance companies

Accepted Answer

A) would insure against specific crop failures. 
B) would not insure against specific crop failures. 
C) would be indifferent between insuring or not. 
D) would find themselves facing prosecution for ignoring the problem for so long. 
A) would insure against specific crop failures. 
B) would not insure against specific crop failures. 
C) would be indifferent between insuring or not. 
D) would find themselves facing prosecution for ignoring the problem for so long.

Question 6

In terms of the stock market, systematic risk refers to the fact that

Accepted Answer

A) some stocks have higher returns than others. 
B) some stocks' returns have a higher variance than others. 
C) all stock prices are correlated with the health of the economy. 
D) most stock prices are perfectly negatively correlated. 
A) some stocks have higher returns than others. 
B) some stocks' returns have a higher variance than others. 
C) all stock prices are correlated with the health of the economy. 
D) most stock prices are perfectly negatively correlated.

Question 7

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

Accepted Answer

E(X)= (0 ∗ .2)+ (100 ∗ .4)+ (300 ∗ .2)=

Question 8

Insurance companies offer only unfair insurance because

Accepted Answer

A) they are run by greedy capitalists. 
B) they can fool customers into buying it. 
C) they have operating costs. 
D) their risks are positively correlated. 
A) they are run by greedy capitalists. 
B) they can fool customers into buying it. 
C) they have operating costs. 
D) their risks are positively correlated.

Question 9

Probability

Accepted Answer

A) is a number between 0 and 1, inclusive. 
B) indicates how likely an outcome is to occur. 
C) is larger the more likely the event is to occur. 
D) All of the above. 
A) is a number between 0 and 1, inclusive. 
B) indicates how likely an outcome is to occur. 
C) is larger the more likely the event is to occur. 
D) All of the above.

Question 10

If an event is unlikely to occur, which probability is a reasonable estimate?

Accepted Answer

A) 0 
B) 0.23 
C) 0.82 
D) Not enough information to determine. 
A) 0 
B) 0.23 
C) 0.82 
D) Not enough information to determine.

Question 11

All else held constant, as the variance of a payoff increases, the

Accepted Answer

A) expected value of the payoff increases. 
B) risk of the payoff increases. 
C) expected value of the payoff decreases. 
D) risk of the payoff decreases. 
A) expected value of the payoff increases. 
B) risk of the payoff increases. 
C) expected value of the payoff decreases. 
D) risk of the payoff decreases.

Question 12

Rahul has a concave utility function. Therefore, if there are two choices, he will pick the ________ if ________ expected value.

Accepted Answer

A) fair bet; both have the same 
B) less risky choice; both have the same 
C) more risky choice; both have the same 
D) less risky choice; it has a lower 
A) fair bet; both have the same 
B) less risky choice; both have the same 
C) more risky choice; both have the same 
D) less risky choice; it has a lower

Question 13

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 tail?

Accepted Answer

A) 0 
B) 1/50 
C) 1/25 
D) 1/2 
A) 0 
B) 1/50 
C) 1/25 
D) 1/2

Question 14

The key economic difference between expected utility and expected value is that

Accepted Answer

A) expected value only considers the value of outcomes, whereas expected utility considers the tradeoff between value and risk. 
B) expected utility only considers the value of outcomes, whereas expected value considers the tradeoff between value and risk. 
C) expected utility is the maximum value obtained, whereas expect value is the mean of the values from a set of possible outcomes. 
D) None of the above-the differences are mathematical, not economic. 
A) expected value only considers the value of outcomes, whereas expected utility considers the tradeoff between value and risk. 
B) expected utility only considers the value of outcomes, whereas expected value considers the tradeoff between value and risk. 
C) expected utility is the maximum value obtained, whereas expect value is the mean of the values from a set of possible outcomes. 
D) None of the above-the differences are mathematical, not economic.

Question 15

Prospect theory can explain why

Accepted Answer

A) people tend to gamble on long odds with small expected utility. 
B) people tend to sell their losing stocks and keep their winning stocks. 
C) people should only sell their losing stocks. 
D) people should never play the lottery. 
A) people tend to gamble on long odds with small expected utility. 
B) people tend to sell their losing stocks and keep their winning stocks. 
C) people should only sell their losing stocks. 
D) people should never play the lottery.

Question 16

Sports announcers often refer to a baseball batter in a hitting slump as "being due." If they are correct, then it must be the case that

Accepted Answer

A) a batter's hits are randomly distributed. 
B) a batter's at-bats are related to each other. 
C) a batter's at-bats are independent of each other. 
D) baseball players are acting irrationally. 
A) a batter's hits are randomly distributed. 
B) a batter's at-bats are related to each other. 
C) a batter's at-bats are independent of each other. 
D) baseball players are acting irrationally.

Question 17

If Stock A sometimes increases and sometimes decreases in value when Stock B decreases in value at the same time, they are

Accepted Answer

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

Question 18

Buying a diversified mutual stock fund allows you to

Accepted Answer

A) completely avoid all types of risk. 
B) avoid only random, unsystematic risk. 
C) avoid only systematic risk. 
D) avoid risk only when all the stock prices are perfectly correlated. 
A) completely avoid all types of risk. 
B) avoid only random, unsystematic risk. 
C) avoid only systematic risk. 
D) avoid risk only when all the stock prices are perfectly correlated.

Question 19

If two events are perfectly positively correlated, then

Accepted Answer

A) diversification is not necessary since there is no risk. 
B) diversification eliminates all risk. 
C) diversification does not reduce risk at all. 
D) diversification only cuts the risk in half. 
A) diversification is not necessary since there is no risk. 
B) diversification eliminates all risk. 
C) diversification does not reduce risk at all. 
D) diversification only cuts the risk in half.

Question 20

Expected utility is

Accepted Answer

A) the maximum utility that a person can get from a set of possible outcomes. 
B) the probability-weighted mean of the utility gained from a set of possible outcomes. 
C) negative for risk-averse people. 
D) indeterminant for risk preferring people. 
A) the maximum utility that a person can get from a set of possible outcomes. 
B) the probability-weighted mean of the utility gained from a set of possible outcomes. 
C) negative for risk-averse people. 
D) indeterminant for risk preferring people.

A risk-preferring person is willing to pay

-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 will buy theft insurance to cover the full $100

If outcomes are , exactly one of the outcomes will occur and the probabilities add up to .

Many people do NOT fully insure against risk because

If global warming began to cause random world-wide damage to crops, insurance companies

In terms of the stock market, systematic risk refers to the fact that

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

Insurance companies offer only unfair insurance because

Probability

If an event is unlikely to occur, which probability is a reasonable estimate?

All else held constant, as the variance of a payoff increases, the

Rahul has a concave utility function. Therefore, if there are two choices, he will pick the if expected value.

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 tail?

The key economic difference between expected utility and expected value is that

Prospect theory can explain why

Sports announcers often refer to a baseball batter in a hitting slump as "being due." If they are correct, then it must be the case that

If Stock A sometimes increases and sometimes decreases in value when Stock B decreases in value at the same time, they are

Buying a diversified mutual stock fund allows you to

If two events are perfectly positively correlated, then

Expected utility is

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

A risk-preferring person is willing to pay

-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 will buy theft insurance to cover the full $100

If outcomes are ________, exactly one of the outcomes will occur and the probabilities add up to ________.

Many people do NOT fully insure against risk because

If global warming began to cause random world-wide damage to crops, insurance companies

In terms of the stock market, systematic risk refers to the fact that

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

Insurance companies offer only unfair insurance because

Probability

If an event is unlikely to occur, which probability is a reasonable estimate?

All else held constant, as the variance of a payoff increases, the

Rahul has a concave utility function. Therefore, if there are two choices, he will pick the ________ if ________ expected value.

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 tail?

The key economic difference between expected utility and expected value is that

Prospect theory can explain why

Sports announcers often refer to a baseball batter in a hitting slump as "being due." If they are correct, then it must be the case that

If Stock A sometimes increases and sometimes decreases in value when Stock B decreases in value at the same time, they are

Buying a diversified mutual stock fund allows you to

If two events are perfectly positively correlated, then

Expected utility is

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

If outcomes are , exactly one of the outcomes will occur and the probabilities add up to .

Rahul has a concave utility function. Therefore, if there are two choices, he will pick the if expected value.