Question 1

Which of the following losses to an individual would an insurance company NOT cover?

Accepted Answer

A) The person's automobile is stolen. 
B) Fire destroys the person's home. 
C) The person's father dies. 
D) The person's country is invaded. 
A) The person's automobile is stolen. 
B) Fire destroys the person's home. 
C) The person's father dies. 
D) The person's country is invaded.

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 is

Accepted Answer

A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) risk premium. 
A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) risk premium.

Question 3

On any given day we know a salesman can earn $0 with a 40% probability, $100 with a 20% probability or $300 with 40% probability. His expected earnings equal

Accepted Answer

A) $0. 
B) $140. 
C) $300. 
D) It cannot be determined from the available information. 
A) $0. 
B) $140. 
C) $300. 
D) It cannot be determined from the available information.

Question 4

Kourtney invested $100 in a project that has a 20% chance of being worth $200 and a 75% chance of being worth $80. One can conclude that Michelle is

Accepted Answer

A) not risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely poor. 
A) not risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely poor.

Question 5

-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. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Accepted Answer

A) $30 
B) $50 
C) $70 
D) $75 
A) $30 
B) $50 
C) $70 
D) $75

Question 6

Which of the following helps to reduce risk?

Accepted Answer

A) Abstain from risk taking. 
B) Obtain more information. 
C) Diversify. 
D) All of the above. 
A) Abstain from risk taking. 
B) Obtain more information. 
C) Diversify. 
D) All of the above.

Question 7

A risk-averse person's expected utility function is

Accepted Answer

A) decreasing. 
B) convex. 
C) concave. 
D) a straight line. 
A) decreasing. 
B) convex. 
C) concave. 
D) a straight line.

Question 8

For the utility function U = Wa, what values of "a" correspond to being risk averse, risk neutral, and risk loving?

Accepted Answer

0 < a < 1 implies ri

Question 9

Assume the following. In location A yearly temperatures range from -30°F to 100°F and in location B yearly temperatures range from 55°F to 75°F. In both locations the average yearly temperature equals 65°F. We can conclude that

Accepted Answer

A) temperature in location A has a higher variance. 
B) temperature in location B has a higher standard deviation. 
C) temperature in location A has a lower standard deviation. 
D) temperatures in both locations have the same standard deviation but different variances. 
A) temperature in location A has a higher variance. 
B) temperature in location B has a higher standard deviation. 
C) temperature in location A has a lower standard deviation. 
D) temperatures in both locations have the same standard deviation but different variances.

Question 10

What is one reason a gambler might bet $1,000 that a sixteenth seed team will win the NCAA basketball tournament?

Accepted Answer

A) irrationality 
B) overconfidence 
C) exuberance 
D) gambler's fallacy 
A) irrationality 
B) overconfidence 
C) exuberance 
D) gambler's fallacy

Question 11

-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 12

Catherine is risk averse. When faced with a choice between a gamble and a certain level of wealth she will

Accepted Answer

A) always prefer the gamble. 
B) always prefer the certain level of wealth. 
C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth. 
A) always prefer the gamble. 
B) always prefer the certain level of wealth. 
C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth.

Question 13

Alvin's utility function is U = W. Barry's utility function is U = W2. Carl's utility function is U = W0.5. Each has wealth of only $100. An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100. Who among the three will make the investment?

Accepted Answer

Carl's expected utility is (0.1 ∗ 1,000^0.5)

Question 14

If a person willingly plays an unfair game that is not in his favor, he is risk loving.

Accepted Answer

A) True 
 B)False

Question 15

What is one reason car insurance seems much cheaper than health insurance?

Accepted Answer

A) Health insurance entails more idiosyncratic than systematic risk, and therefore the gains to diversification are more dramatic. 
B) Car insurance entails more systematic than idiosyncratic risk, and therefore the gains to diversification are more dramatic. 
C) Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification. 
D) Health insurance is manipulated through market power, and car insurance is not. 
A) Health insurance entails more idiosyncratic than systematic risk, and therefore the gains to diversification are more dramatic. 
B) Car insurance entails more systematic than idiosyncratic risk, and therefore the gains to diversification are more dramatic. 
C) Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification. 
D) Health insurance is manipulated through market power, and car insurance is not.

Question 16

Lauren noticed that in the last 60 games, her hometown minor league baseball team won 40 times. Lauren estimate the probability of losing the game to be

Accepted Answer

A) 1/6. 
B) 1/4. 
C) 1/3. 
D) 1/2. 
A) 1/6. 
B) 1/4. 
C) 1/3. 
D) 1/2.

Question 17

The rate of return on bonds is lower than on stocks over time because

Accepted Answer

A) bond holders cannot diversify. 
B) bonds have a lower standard deviation in returns. 
C) stocks have less non-diversifiable risks than bonds. 
D) bonds are subject to more random risks than stocks. 
A) bond holders cannot diversify. 
B) bonds have a lower standard deviation in returns. 
C) stocks have less non-diversifiable risks than bonds. 
D) bonds are subject to more random risks than stocks.

Question 18

Empirical evidence suggests that usury laws

Accepted Answer

A) help poor consumers by lowering the interest rate they pay. 
B) hurt poor consumers by limiting their ability to borrow. 
C) keep interest rates low. 
D) limit the amount borrowed by wealthier consumers. 
A) help poor consumers by lowering the interest rate they pay. 
B) hurt poor consumers by limiting their ability to borrow. 
C) keep interest rates low. 
D) limit the amount borrowed by wealthier consumers.

Question 19

Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.

Accepted Answer

Risk that cannot be diversified away aff

Question 20

One aspect of prospect theory is that people tend to

Accepted Answer

A) be very risk averse to large gains. 
B) be very risk averse to losses. 
C) love losses more than gains. 
D) hate gains regardless of potential losses. 
A) be very risk averse to large gains. 
B) be very risk averse to losses. 
C) love losses more than gains. 
D) hate gains regardless of potential losses.

Which of the following losses to an individual would an insurance company NOT cover?

-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

On any given day we know a salesman can earn $0 with a 40% probability, $100 with a 20% probability or $300 with 40% probability. His expected earnings equal

Kourtney invested $100 in a project that has a 20% chance of being worth $200 and a 75% chance of being worth $80. One can conclude that Michelle is

-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. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Which of the following helps to reduce risk?

A risk-averse person's expected utility function is

For the utility function U = W^a, what values of "a" correspond to being risk averse, risk neutral, and risk loving?

Assume the following. In location A yearly temperatures range from -30°F to 100°F and in location B yearly temperatures range from 55°F to 75°F. In both locations the average yearly temperature equals 65°F. We can conclude that

What is one reason a gambler might bet $1,000 that a sixteenth seed team will win the NCAA basketball tournament?

-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

Catherine is risk averse. When faced with a choice between a gamble and a certain level of wealth she will

Alvin's utility function is U = W. Barry's utility function is U = W². Carl's utility function is U = W^0.5. Each has wealth of only $100. An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100. Who among the three will make the investment?

If a person willingly plays an unfair game that is not in his favor, he is risk loving.

What is one reason car insurance seems much cheaper than health insurance?

Lauren noticed that in the last 60 games, her hometown minor league baseball team won 40 times. Lauren estimate the probability of losing the game to be

The rate of return on bonds is lower than on stocks over time because

Empirical evidence suggests that usury laws

Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.

One aspect of prospect theory is that people tend to

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Externalities, Open-Access, and Public Goods

Asymmetric Information

Contracts and Moral Hazards

Filters

Exam 17: Uncertainty

Which of the following losses to an individual would an insurance company NOT cover?

-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

On any given day we know a salesman can earn $0 with a 40% probability, $100 with a 20% probability or $300 with 40% probability. His expected earnings equal

Kourtney invested $100 in a project that has a 20% chance of being worth $200 and a 75% chance of being worth $80. One can conclude that Michelle is

-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. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Which of the following helps to reduce risk?

A risk-averse person's expected utility function is

For the utility function U = Wa, what values of "a" correspond to being risk averse, risk neutral, and risk loving?

Assume the following. In location A yearly temperatures range from -30°F to 100°F and in location B yearly temperatures range from 55°F to 75°F. In both locations the average yearly temperature equals 65°F. We can conclude that

What is one reason a gambler might bet $1,000 that a sixteenth seed team will win the NCAA basketball tournament?

-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

Catherine is risk averse. When faced with a choice between a gamble and a certain level of wealth she will

Alvin's utility function is U = W. Barry's utility function is U = W2. Carl's utility function is U = W0.5. Each has wealth of only $100. An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100. Who among the three will make the investment?

If a person willingly plays an unfair game that is not in his favor, he is risk loving.

What is one reason car insurance seems much cheaper than health insurance?

Lauren noticed that in the last 60 games, her hometown minor league baseball team won 40 times. Lauren estimate the probability of losing the game to be

The rate of return on bonds is lower than on stocks over time because

Empirical evidence suggests that usury laws

Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.

One aspect of prospect theory is that people tend to

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Externalities, Open-Access, and Public Goods

Asymmetric Information

Contracts and Moral Hazards

Filters

For the utility function U = W^a, what values of "a" correspond to being risk averse, risk neutral, and risk loving?

Alvin's utility function is U = W. Barry's utility function is U = W². Carl's utility function is U = W^0.5. Each has wealth of only $100. An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100. Who among the three will make the investment?