Question 1

Given uncertainty, individuals attempt to maximize their:

Accepted Answer

A)  adverse selection. 
B)  expected utility. 
C)  risk aversion. 
D)  consumption. 
A)  adverse selection. 
B)  expected utility. 
C)  risk aversion. 
D)  consumption. B

Question 2

Use the following to answer questions:  
-(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. We know that Tyler is risk-averse because:

Accepted Answer

A)  Tyler would prefer $40,000 but there is a risk she will make only $20,000. 
B)  Tyler's expected income is less than what she may actually earn. 
C)  Tyler's expected income is more than what she may actually earn. 
D)  Tyler is subject to diminishing marginal utility from income. 
A)  Tyler would prefer $40,000 but there is a risk she will make only $20,000. 
B)  Tyler's expected income is less than what she may actually earn. 
C)  Tyler's expected income is more than what she may actually earn. 
D)  Tyler is subject to diminishing marginal utility from income. D

Question 3

The expected value of a random variable is:

Accepted Answer

A)  the most frequently occurring value of that variable. 
B)  the most recent value of that variable. 
C)  the weighted average of all possible values, where the weights on each possible value correspond to the probability of that value occurring. 
D)  impossible to determine. 
A)  the most frequently occurring value of that variable. 
B)  the most recent value of that variable. 
C)  the weighted average of all possible values, where the weights on each possible value correspond to the probability of that value occurring. 
D)  impossible to determine. C

Question 4

Moral hazard can be reduced by:

Accepted Answer

A)  the use of 100% insurance coverage. 
B)  imposing a deductible on insurance coverage. 
C)  taking away personal stakes for people with private information. 
D)  offering fewer incentives to people with private information to act in a less risky manner. 
A)  the use of 100% insurance coverage. 
B)  imposing a deductible on insurance coverage. 
C)  taking away personal stakes for people with private information. 
D)  offering fewer incentives to people with private information to act in a less risky manner.

Question 5

Use the following to answer questions:  
-(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 is her expected income?

Accepted Answer

A)  $28,000 
B)  $29,000 
C)  $30,000 
D)  $31,000 
A)  $28,000 
B)  $29,000 
C)  $30,000 
D)  $31,000

Question 6

Use the following to answer questions:  
-(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses. Mr. and Mrs. Smith would be willing to pay as much as _____ for insurance to pay their daughter's tuition and eliminate the uncertainty in the family's income after tuition.

Accepted Answer

A)  $12,000 
B)  $10,000 
C)  $8,000 
D)  $5,000 
A)  $12,000 
B)  $10,000 
C)  $8,000 
D)  $5,000

Question 7

In a particular insurance market, there is a decrease in the degree of risk aversion among buyers. Holding everything else constant, the equilibrium premium will _____ and the equilibrium quantity of insurance will _____.

Accepted Answer

A)  increase; increase 
B)  decrease; decrease 
C)  increase; decrease 
D)  decrease; increase 
A)  increase; increase 
B)  decrease; decrease 
C)  increase; decrease 
D)  decrease; increase

Question 8

The future price of one share of General Motors stock is a random variable.

Accepted Answer

A) True 
 B)False

Question 9

Use the following to answer questions:  
-(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 10

Mary and Bob are trying to decide how much auto insurance to buy. They share the same expectations of an accident, with the same dollar loss. They also have the same income levels. However, Mary would rather buy very little insurance, while Bob would rather buy much more insurance. This suggests that:

Accepted Answer

A)  Bob is more risk-averse than Mary. 
B)  Mary is more risk-averse than Bob. 
C)  Bob is risk-averse and Mary is risk-loving. 
D)  Mary is risk-averse and Bob is risk-loving. 
A)  Bob is more risk-averse than Mary. 
B)  Mary is more risk-averse than Bob. 
C)  Bob is risk-averse and Mary is risk-loving. 
D)  Mary is risk-averse and Bob is risk-loving.

Question 11

Louis has invested $1,000 in the stock market. At the end of one year, there is a 30% chance that his stock will be worth only $800 and a 70% chance that it will be worth $1,200. The expected value of his stock at the end of one year is:

Accepted Answer

A)  $1,000. 
B)  $1,080. 
C)  $1,200. 
D)  $1,160. 
A)  $1,000. 
B)  $1,080. 
C)  $1,200. 
D)  $1,160.

Question 12

You have one ticket for a raffle with a grand prize of $1,000. There are two prizes worth $100 and five prizes worth $20. If only 100 tickets have been distributed, what is the expected value of your winnings?

Accepted Answer

Expected value = 0.0

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Use the following to answer questions:  
-(Table: Amy's Utility Function) Look at the table Amy's Utility Function. Amy is an entrepreneur with current income equal to $40,000. Amy is considering development of a new product. The probability that her new product earns Amy $10,000 in additional income is 0.5, and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5. Suppose Amy can buy a fair insurance policy that will compensate her for any losses. Amy's premium will be _____, her guaranteed income will be _____, and her expected utility will be _____ utils.

Accepted Answer

A)  $5,000; $10,000; 200 
B)  $10,000; $30,000; 500 
C)  $10,000; $40,000; 620 
D)  $30,000; $50,000; 720 
A)  $5,000; $10,000; 200 
B)  $10,000; $30,000; 500 
C)  $10,000; $40,000; 620 
D)  $30,000; $50,000; 720

Question 15

Assume that flood insurance premiums are determined in the competitive market. Suppose that devastating floods along the Mississippi River have increased the degree of risk aversion among the insurance investors in this market. The _____ insurance shifts _____, leading to a(n) _____ in equilibrium premiums and a(n) _____ in the quantity of insurance bought and sold.

Accepted Answer

A)  supply of; rightward; decrease; increase 
B)  demand for; leftward; decrease; decrease 
C)  supply of; leftward; increase; decrease 
D)  demand for; rightward; increase; increase 
A)  supply of; rightward; decrease; increase 
B)  demand for; leftward; decrease; decrease 
C)  supply of; leftward; increase; decrease 
D)  demand for; rightward; increase; increase

Question 16

Moral hazard:

Accepted Answer

A)  occurs when incentives are distorted because an individual knows more about his or her own actions than other people do. 
B)  is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting). 
C)  is a term used synonymously with value judgment. 
D)  refers to the questionable morality of price gouging in hazardous times (e.g., in the presence of famines or floods). 
A)  occurs when incentives are distorted because an individual knows more about his or her own actions than other people do. 
B)  is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting). 
C)  is a term used synonymously with value judgment. 
D)  refers to the questionable morality of price gouging in hazardous times (e.g., in the presence of famines or floods).

Question 17

Use the following to answer questions:  
-(Table: Amy's Utility Function) Look at the table Amy's Utility Function. Amy is an entrepreneur with current income equal to $40,000. Amy is considering development of a new product. The probability that her new product earns Amy $30,000 in additional income is 0.5, and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5. Amy's expected utility after developing her new product is _____ utils.

Accepted Answer

A)  1,360 
B)  860 
C)  500 
D)  680 
A)  1,360 
B)  860 
C)  500 
D)  680

Question 18

Rhonda would like a better bicycle, and she considers selling her old one by advertising on the bulletin board in the student center. She decides against it because the used bicycles listed on the board are underpriced. This describes the problem of:

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  positive correlation. 
D)  risk aversion. 
A)  adverse selection. 
B)  moral hazard. 
C)  positive correlation. 
D)  risk aversion.

Question 19

Amanda recently graduated from college, and she has a job offer with uncertain income. There is a 70% probability that she will make $10,000 and a 30% probability that she will make $70,000. Suppose Amanda is offered another job with a certain income. All else equal, if she has a constant marginal utility of income, she will accept the second job offer only if it pays more than:

Accepted Answer

A)  $40,000. 
B)  $28,000. 
C)  $10,000. 
D)  $21,000. 
A)  $40,000. 
B)  $28,000. 
C)  $10,000. 
D)  $21,000.

Question 20

Used-car dealers will often advertise how long they have been in business as a means of _____ their long-term _____.

Accepted Answer

A)  signaling; reputation 
B)  screening; customers 
C)  insuring; capital at risk 
D)  revealing; moral hazard 
A)  signaling; reputation 
B)  screening; customers 
C)  insuring; capital at risk 
D)  revealing; moral hazard

Given uncertainty, individuals attempt to maximize their:

The expected value of a random variable is:

Moral hazard can be reduced by:

In a particular insurance market, there is a decrease in the degree of risk aversion among buyers. Holding everything else constant, the equilibrium premium will _ and the equilibrium quantity of insurance will _.

The future price of one share of General Motors stock is a random variable.

Louis has invested $1,000 in the stock market. At the end of one year, there is a 30% chance that his stock will be worth only $800 and a 70% chance that it will be worth $1,200. The expected value of his stock at the end of one year is:

You have one ticket for a raffle with a grand prize of $1,000. There are two prizes worth $100 and five prizes worth $20. If only 100 tickets have been distributed, what is the expected value of your winnings?

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

Moral hazard:

Rhonda would like a better bicycle, and she considers selling her old one by advertising on the bulletin board in the student center. She decides against it because the used bicycles listed on the board are underpriced. This describes the problem of:

Used-car dealers will often advertise how long they have been in business as a means of _ their long-term _.

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals 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 Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Filters

Exam 20: Uncertainty, Risk, and Private Information

Given uncertainty, individuals attempt to maximize their:

The expected value of a random variable is:

Moral hazard can be reduced by:

In a particular insurance market, there is a decrease in the degree of risk aversion among buyers. Holding everything else constant, the equilibrium premium will _____ and the equilibrium quantity of insurance will _____.

The future price of one share of General Motors stock is a random variable.

Louis has invested $1,000 in the stock market. At the end of one year, there is a 30% chance that his stock will be worth only $800 and a 70% chance that it will be worth $1,200. The expected value of his stock at the end of one year is:

You have one ticket for a raffle with a grand prize of $1,000. There are two prizes worth $100 and five prizes worth $20. If only 100 tickets have been distributed, what is the expected value of your winnings?

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

Moral hazard:

Rhonda would like a better bicycle, and she considers selling her old one by advertising on the bulletin board in the student center. She decides against it because the used bicycles listed on the board are underpriced. This describes the problem of:

Used-car dealers will often advertise how long they have been in business as a means of _____ their long-term _____.

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals 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 Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Filters

In a particular insurance market, there is a decrease in the degree of risk aversion among buyers. Holding everything else constant, the equilibrium premium will _ and the equilibrium quantity of insurance will _.

Used-car dealers will often advertise how long they have been in business as a means of _ their long-term _.