Question 1

Jaime buys home insurance, but never ends up making a claim. What can be said about Jaime's decision to buy home insurance?

Accepted Answer

A) It is considered by economists to be irrational behavior. 
B) Buying the insurance was a bad decision. 
C) Buying the insurance was not necessarily a bad decision. 
D) It is a poor use of money. 
A) It is considered by economists to be irrational behavior. 
B) Buying the insurance was a bad decision. 
C) Buying the insurance was not necessarily a bad decision. 
D) It is a poor use of money.

Question 2

When deciding whether to deposit money in a bank:

Accepted Answer

A) everyone will respond exactly the same to any given interest rate. 
B) some people will require a higher interest rate to deposit the same amount of money as others. 
C) people don't accurately account for the risk of losing savings. 
D) most people will deposit a specific amount of money regardless of the interest rate. 
A) everyone will respond exactly the same to any given interest rate. 
B) some people will require a higher interest rate to deposit the same amount of money as others. 
C) people don't accurately account for the risk of losing savings. 
D) most people will deposit a specific amount of money regardless of the interest rate.

Question 3

Present value:

Accepted Answer

A) is always greater than the future value of money. 
B) does not account for inflation. 
C) is how much an amount of money obtained in the future is worth today. 
D) All of these are true. 
A) is always greater than the future value of money. 
B) does not account for inflation. 
C) is how much an amount of money obtained in the future is worth today. 
D) All of these are true.

Question 4

Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, $20 is won, and if it is blue, $1 is won. The second game has a bag with 10 marbles in it-1 red, 4 blue, and 5 green. The player draws one marble from the bag; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.Jack will play a game if the expected payoff is higher than the cost of playing. Comparing the expected value of the payoff of each game to the price of $5 to play, we can conclude that Jack should:

Accepted Answer

A) play the second game, but not the first. 
B) play neither game. 
C) play the first game, but not the second. 
D) play both games. 
A) play the second game, but not the first. 
B) play neither game. 
C) play the first game, but not the second. 
D) play both games.

Question 5

Which of the following statements about risk is true?

Accepted Answer

A) Risk occurs when the costs or benefits of an event or choice are uncertain. 
B) It explains why the changing value of money is such a challenge. 
C) Risk should always be avoided, at any cost. 
D) None of these statements are true. 
A) Risk occurs when the costs or benefits of an event or choice are uncertain. 
B) It explains why the changing value of money is such a challenge. 
C) Risk should always be avoided, at any cost. 
D) None of these statements are true.

Question 6

What is the total amount owed on a loan of $2,000 after a year at 2 percent interest?

Accepted Answer

A) $4,000 
B) $2,020 
C) $2,040 
D) $2,400 
A) $4,000 
B) $2,020 
C) $2,040 
D) $2,400

Question 7

Adverse selection:

Accepted Answer

A) occurs when buyers and sellers have different information about the riskiness of a situation. 
B) can result in a failure to complete transactions that would have been possible if both sides had the same information. 
C) refers to the tendency for people with higher risk to be drawn toward insurance. 
D) All of these are true. 
A) occurs when buyers and sellers have different information about the riskiness of a situation. 
B) can result in a failure to complete transactions that would have been possible if both sides had the same information. 
C) refers to the tendency for people with higher risk to be drawn toward insurance. 
D) All of these are true.

Question 8

Knowing how to translate between present and future value can be useful when:

Accepted Answer

A) the benefits and costs occur at different times. 
B) the benefits and costs occur at the same time. 
C) the present costs are higher than the present benefits. 
D) there are no benefits and costs. 
A) the benefits and costs occur at different times. 
B) the benefits and costs occur at the same time. 
C) the present costs are higher than the present benefits. 
D) there are no benefits and costs.

Question 9

Risk-seeking behavior:

Accepted Answer

A) is irrational. 
B) is an aspect of an individual's preferences. 
C) is the same for everyone. 
D) All of these are true. 
A) is irrational. 
B) is an aspect of an individual's preferences. 
C) is the same for everyone. 
D) All of these are true.

Question 10

What is the amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent?

Accepted Answer

A) $1,600 
B) $41,600 
C) $40,400 
D) $160 
A) $1,600 
B) $41,600 
C) $40,400 
D) $160

Question 11

The interest rate:

Accepted Answer

A) is expressed as a percentage per dollar borrowed and per unit of time. 
B) tells us how much less money is worth today than in the future. 
C) exists only because lending is risky. 
D) All of these are true. 
A) is expressed as a percentage per dollar borrowed and per unit of time. 
B) tells us how much less money is worth today than in the future. 
C) exists only because lending is risky. 
D) All of these are true.

Question 12

In the context of insurance, moral hazard refers to:

Accepted Answer

A) the tendency for people to behave in a riskier way after they have acquired insurance. 
B) the tendency for high-risk individuals to seek out more insurance than low-risk individuals. 
C) when people organize themselves into a group to collectively absorb the cost of the risk faced by each individual. 
D) when risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual. 
A) the tendency for people to behave in a riskier way after they have acquired insurance. 
B) the tendency for high-risk individuals to seek out more insurance than low-risk individuals. 
C) when people organize themselves into a group to collectively absorb the cost of the risk faced by each individual. 
D) when risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual.

Question 13

Investing all your money in one company is an example of:

Accepted Answer

A) risk diversification. 
B) risk pooling. 
C) risk aversion. 
D) None of these are true. 
A) risk diversification. 
B) risk pooling. 
C) risk aversion. 
D) None of these are true.

Question 14

The value of $100 changes over time because:

Accepted Answer

A) there is an opportunity cost of waiting for money in the future. 
B) people prefer to save money rather than spend it immediately. 
C) the government collects taxes. 
D) None of these are true. 
A) there is an opportunity cost of waiting for money in the future. 
B) people prefer to save money rather than spend it immediately. 
C) the government collects taxes. 
D) None of these are true.

Question 15

In the context of insurance, everyone typically has to pay a higher premium because of:

Accepted Answer

A) risk pooling. 
B) diversification. 
C) risk aversion. 
D) adverse selection. 
A) risk pooling. 
B) diversification. 
C) risk aversion. 
D) adverse selection.

Question 16

Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, $20 is won, and if it is blue, $1 is won. The second game has a bag with 10 marbles in it-1 red, 4 blue, and 5 green. The player draws one marble from the bag; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.The expected value of the payoff is _______ for the first game and _______ for the second game.

Accepted Answer

A) $5.00; $4.50 
B) $5.75; $4.50 
C) $4.50; $5.75 
D) $5.75; $5.25 
A) $5.00; $4.50 
B) $5.75; $4.50 
C) $4.50; $5.75 
D) $5.75; $5.25

Question 17

The key to diversification is that the risks one undertakes should be:

Accepted Answer

A) positively correlated. 
B) uncorrelated. 
C) negatively correlated. 
D) easy to reduce. 
A) positively correlated. 
B) uncorrelated. 
C) negatively correlated. 
D) easy to reduce.

Question 18

Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, $20 is won, and if it is blue, $1 is won. The second game has a bag with 10 marbles in it-1 red, 4 blue, and 5 green. The player draws one marble from the bag; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.If Kate only cares about the expected value of the outcome, and does not care about risk, she should:

Accepted Answer

A) not play the second game because she never wins anything. 
B) play the second game because she will always win some amount of money. 
C) not play the second game because the cost of playing the game is greater than the expected value of the payoff. 
D) play the second game because the cost of playing the game is less than the expected value of the payoff. 
A) not play the second game because she never wins anything. 
B) play the second game because she will always win some amount of money. 
C) not play the second game because the cost of playing the game is greater than the expected value of the payoff. 
D) play the second game because the cost of playing the game is less than the expected value of the payoff.

Question 19

Which of the following is a mechanism for reallocating risk?

Accepted Answer

A) Risk premiums 
B) Dividend pooling 
C) Diversification 
D) All of these are mechanisms for reallocating risk. 
A) Risk premiums 
B) Dividend pooling 
C) Diversification 
D) All of these are mechanisms for reallocating risk.

Question 20

When risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual, it is called:

Accepted Answer

A) diversification. 
B) risk pooling. 
C) risk aversion. 
D) risk analysis. 
A) diversification. 
B) risk pooling. 
C) risk aversion. 
D) risk analysis.

Jaime buys home insurance, but never ends up making a claim. What can be said about Jaime's decision to buy home insurance?

When deciding whether to deposit money in a bank:

Present value:

Which of the following statements about risk is true?

What is the total amount owed on a loan of $2,000 after a year at 2 percent interest?

Adverse selection:

Knowing how to translate between present and future value can be useful when:

Risk-seeking behavior:

What is the amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent?

The interest rate:

In the context of insurance, moral hazard refers to:

Investing all your money in one company is an example of:

The value of $100 changes over time because:

In the context of insurance, everyone typically has to pay a higher premium because of:

The key to diversification is that the risks one undertakes should be:

Which of the following is a mechanism for reallocating risk?

When risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual, it is called:

Economics and Life

Specialization and Exchange

Markets

Elasticity

Efficiency

Government Intervention

Consumer Behavior

Behavioral Economics: a Closer Look at Decision Making

Game Theory and Strategic Thinking

Information

The Costs of Production

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

The Facts of Production

International Trade

Externalities

Public Goods and Common Resources

Taxation and the Public Budget

Poverty, Inequality, and Discrimination

Political Choices

Public Policy and Choice Architecture

Filters

Exam 11: Time and Uncertainty

Jaime buys home insurance, but never ends up making a claim. What can be said about Jaime's decision to buy home insurance?

When deciding whether to deposit money in a bank:

Present value:

Which of the following statements about risk is true?

What is the total amount owed on a loan of $2,000 after a year at 2 percent interest?

Adverse selection:

Knowing how to translate between present and future value can be useful when:

Risk-seeking behavior:

What is the amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent?

The interest rate:

In the context of insurance, moral hazard refers to:

Investing all your money in one company is an example of:

The value of $100 changes over time because:

In the context of insurance, everyone typically has to pay a higher premium because of:

The key to diversification is that the risks one undertakes should be:

Which of the following is a mechanism for reallocating risk?

When risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual, it is called:

Economics and Life

Specialization and Exchange

Markets

Elasticity

Efficiency

Government Intervention

Consumer Behavior

Behavioral Economics: a Closer Look at Decision Making

Game Theory and Strategic Thinking

Information

The Costs of Production

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

The Facts of Production

International Trade

Externalities

Public Goods and Common Resources

Taxation and the Public Budget

Poverty, Inequality, and Discrimination

Political Choices

Public Policy and Choice Architecture

Filters