Question 1

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 2

When Lloyd's of London offered to provide insurance to merchant ships in the eighteenth century, Lloyd's was:

Accepted Answer

A)  exhibiting risk-averse behavior. 
B)  less sensitive to risk than those who requested insurance. 
C)  attempting to decrease its exposure to risk. 
D)  not very rational in its behavior. 
A)  exhibiting risk-averse behavior. 
B)  less sensitive to risk than those who requested insurance. 
C)  attempting to decrease its exposure to risk. 
D)  not very rational in its behavior.

Question 3

Use the following to answer questions:  
-(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility. Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work. If there is a 25% probability that Natasha will be late with her work and her income will then equal $30,000, her expected income is:

Accepted Answer

A)  $32,500. 
B)  $38,200. 
C)  $40,500. 
D)  $45,000. 
A)  $32,500. 
B)  $38,200. 
C)  $40,500. 
D)  $45,000.

Question 4

A random variable:

Accepted Answer

A)  has an uncertain future value. 
B)  has a constant value. 
C)  doesn't exist in economics. 
D)  is useless in economic decision making. 
A)  has an uncertain future value. 
B)  has a constant value. 
C)  doesn't exist in economics. 
D)  is useless in economic decision making.

Question 5

Use the following to answer questions:
Scenario: Health Costs
Alan is hoping for a healthy year, meaning that he would have zero health costs. Given his habits, there is a 40% chance that Alan will develop a health issue resulting in $50,000 in health costs. Assume these are the only two conditions that could exist for Alan in the coming year.
-(Scenario: Health Costs) Look at the scenario Health Costs. When Alan's probability of developing a health problem decreases, holding everything else constant, Alan's expected value of health care costs:

Accepted Answer

A)  increases. 
B)  decreases. 
C)  stays constant. 
D)  increases, decreases, or stays constant. 
A)  increases. 
B)  decreases. 
C)  stays constant. 
D)  increases, decreases, or stays constant.

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. What certain income after tuition leaves Mr. and Mrs. Smith just as well off as their uncertain income after tuition?

Accepted Answer

A)  $37,500 
B)  $38,000 
C)  $40,500 
D)  $42,500 
A)  $37,500 
B)  $38,000 
C)  $40,500 
D)  $42,500

Question 7

Use the following to answer questions:  
-(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility. Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work. If there is a 25% probability that Natasha will be late with her work and her income will equal $30,000, the premium for a fair insurance policy to eliminate the uncertainty in her income would equal:

Accepted Answer

A)  $4,000. 
B)  $5,000. 
C)  $7,500. 
D)  $9,500. 
A)  $4,000. 
B)  $5,000. 
C)  $7,500. 
D)  $9,500.

Question 8

Individuals differ in risk aversion because of:

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 9

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. 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 10

In a particular insurance market, there is a decrease in the degree of risk aversion among suppliers. 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 11

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 30%, that it makes it to television but is not the most viewed show in its time slot is 50%, 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 12

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

Accepted Answer

A)  a moral hazard. 
B)  risk-loving. 
C)  risk-averse. 
D)  risk-neutral. 
A)  a moral hazard. 
B)  risk-loving. 
C)  risk-averse. 
D)  risk-neutral.

Question 13

When an individual knows more about his or her own actions than other people do, incentives are distorted, which causes:

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  screening. 
D)  signaling. 
A)  moral hazard. 
B)  adverse selection. 
C)  screening. 
D)  signaling.

Question 14

Use the following to answer questions:
Scenario: Used Car Market
In the used car market, cars of poor quality are called lemons, while cars of good quality are plums. Suppose the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%. Also assume a plum is worth $15,000 and a lemon is worth $3,000.
-(Scenario: Used Car Market) Look at the scenario Used Car Market. If buyers cannot distinguish between lemons and plums, eventually this used car market will:

Accepted Answer

A)  be made up mostly of lemons. 
B)  have buyers who will have a 50% chance of choosing a plum. 
C)  be made up mostly of plums. 
D)  be made up of 50% plums and 50% lemons. 
A)  be made up mostly of lemons. 
B)  have buyers who will have a 50% chance of choosing a plum. 
C)  be made up mostly of plums. 
D)  be made up of 50% plums and 50% lemons.

Question 15

Suppose the wealth of buyers in the insurance market falls. We would expect insurance premiums to _____ as the _____ curve shifts _____.

Accepted Answer

A)  rise; supply; left 
B)  fall; supply; right 
C)  fall; demand; left 
D)  rise; demand; right 
A)  rise; supply; left 
B)  fall; supply; right 
C)  fall; demand; left 
D)  rise; demand; right

Question 16

Use the following to answer questions:  
-(Table: Natasha's Total Utility) Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work. If there is a 25% probability that Natasha will be late with her work and her income will then equal $30,000, her expected total utility is _____ utils.

Accepted Answer

A)  4,175 
B)  3,700 
C)  3,620 
D)  3,259 
A)  4,175 
B)  3,700 
C)  3,620 
D)  3,259

Question 17

Use the following to answer questions:
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 will lose $5,000. However, if it is a rainy year and he invests only in the rain poncho company, he will earn $10,000. If it is a sunny year and he invests only in the sunglass company, he will earn $10,000; if he invests only in the rain poncho company, he will 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) Look at the scenario Diversification. If Morris invests all of his money in the sunglass 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 18

Sellers of used cars may have private information to which buyers are not privy. This leads to all of the following EXCEPT:

Accepted Answer

A)  lower prices for the cars. 
B)  a shortage of used cars on the market. 
C)  many mutually beneficial transactions not taking place. 
D)  potential sellers willing to sell only at high prices. 
A)  lower prices for the cars. 
B)  a shortage of used cars on the market. 
C)  many mutually beneficial transactions not taking place. 
D)  potential sellers willing to sell only at high prices.

Question 19

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

Accepted Answer

A)  a major recession in Western Europe and the United States. 
B)  terror attacks by the IRA. 
C)  asbestos claims. 
D)  the war in Iraq. 
A)  a major recession in Western Europe and the United States. 
B)  terror attacks by the IRA. 
C)  asbestos claims. 
D)  the war in Iraq.

Question 20

Use the following to answer questions:
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 will lose $5,000. However, if it is a rainy year and he invests only in the rain poncho company, he will earn $10,000. If it is a sunny year and he invests only in the sunglass company, he will earn $10,000; if he invests only in the rain poncho company, he will 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) Look at 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

Which of the following regarding a warranty is NOT true?

When Lloyd's of London offered to provide insurance to merchant ships in the eighteenth century, Lloyd's was:

A random variable:

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. What certain income after tuition leaves Mr. and Mrs. Smith just as well off as their uncertain income after tuition?

Individuals differ in risk aversion because of:

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. The Smith family's expected total utility is _____ utils.

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

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

When an individual knows more about his or her own actions than other people do, incentives are distorted, which causes:

Suppose the wealth of buyers in the insurance market falls. We would expect insurance premiums to ___ as the _ curve shifts ___.

Sellers of used cars may have private information to which buyers are not privy. This leads to all of the following EXCEPT:

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

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

Which of the following regarding a warranty is NOT true?

When Lloyd's of London offered to provide insurance to merchant ships in the eighteenth century, Lloyd's was:

A random variable:

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. What certain income after tuition leaves Mr. and Mrs. Smith just as well off as their uncertain income after tuition?

Individuals differ in risk aversion because of:

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. The Smith family's expected total utility is _____ utils.

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

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

When an individual knows more about his or her own actions than other people do, incentives are distorted, which causes:

Suppose the wealth of buyers in the insurance market falls. We would expect insurance premiums to _____ as the _____ curve shifts _____.

Sellers of used cars may have private information to which buyers are not privy. This leads to all of the following EXCEPT:

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

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 suppliers. Holding everything else constant, the equilibrium premium will _ and the equilibrium quantity of insurance will _.

Suppose the wealth of buyers in the insurance market falls. We would expect insurance premiums to ___ as the _ curve shifts ___.