Question 1

A share of a restaurant chain can be worth $2 with a probability of 0.40 and $10 with a probability of 0.60. What is the variance of the price of this share?

Accepted Answer

A) 3 
B) 5 
C) 6 
D) 8.5 
A) 3 
B) 5 
C) 6 
D) 8.5

Question 2

Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires)a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 50% chance that any variety will be retired. When Sarah buys her next stuffed animal, the expected profit is

Accepted Answer

A) $50. 
B) $47.50. 
C) $45.00. 
D) $0. 
A) $50. 
B) $47.50. 
C) $45.00. 
D) $0.

Question 3

A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is

Accepted Answer

A) 15.8. 
B) 249.50. 
C) 249.75. 
D) 499. 
A) 15.8. 
B) 249.50. 
C) 249.75. 
D) 499.

Question 4

John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000. From this, we can conclude that John

Accepted Answer

A) is risk averse. 
B) is risk loving. 
C) is risk neutral. 
D) has a negative marginal utility of wealth. 
A) is risk averse. 
B) is risk loving. 
C) is risk neutral. 
D) has a negative marginal utility of wealth.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A) Compared to stocks, bonds have a higher return. 
B) Compared to stocks, bond returns have a higher standard deviation. 
C) Compared to bonds, stock returns have a lower standard deviation. 
D) Compared to bonds, stock returns have a higher standard deviation. 
A) Compared to stocks, bonds have a higher return. 
B) Compared to stocks, bond returns have a higher standard deviation. 
C) Compared to bonds, stock returns have a lower standard deviation. 
D) Compared to bonds, stock returns have a higher standard deviation.

Question 6

-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. If Bob could keep $50 with certainty, his utility would be

Accepted Answer

A) a. 
B) b. 
C) c. 
D) d. 
A) a. 
B) b. 
C) c. 
D) d.

Question 7

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT

Accepted Answer

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

Question 8

A risk-averse investor will decide whether or not to invest by determining if the expected value of the investment if positive.

Accepted Answer

A) True 
 B)False

Question 9

Usury laws result in banks making less credit available to lower-income households because

Accepted Answer

A) higher-income households will pay a higher interest rate than lower-income households. 
B) loans made to higher-income households have no risk. 
C) loans to lower-income households are riskier than loans to higher-income households. 
D) the regulated interest rate does not adequately compensate the bank for the risk of the loan to a lower-income household. 
A) higher-income households will pay a higher interest rate than lower-income households. 
B) loans made to higher-income households have no risk. 
C) loans to lower-income households are riskier than loans to higher-income households. 
D) the regulated interest rate does not adequately compensate the bank for the risk of the loan to a lower-income household.

Question 10

What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100, and 80% of the time returns $50? Explain.

Accepted Answer

This person is risk preferring

Question 11

-The above figure shows Bob's utility function, which is

Accepted Answer

A) concave. 
B) convex. 
C) linear. 
D) L-shaped. 
A) concave. 
B) convex. 
C) linear. 
D) L-shaped.

Question 12

Insurance companies do NOT cover losses that would

Accepted Answer

A) happen to all of the policyholders at once. 
B) happen with a very low probability. 
C) happen to just a handful of policyholders. 
D) happen with uncertainty. 
A) happen to all of the policyholders at once. 
B) happen with a very low probability. 
C) happen to just a handful of policyholders. 
D) happen with uncertainty.

Question 13

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

Accepted Answer

If two returns are perfectly p

Question 14

A stock mutual fund is generally

Accepted Answer

A) less risky than buying individual stocks. 
B) more risky than buying individual stocks. 
C) just as risky as buying individual stocks. 
D) a way for the rich to avoid taxes. 
A) less risky than buying individual stocks. 
B) more risky than buying individual stocks. 
C) just as risky as buying individual stocks. 
D) a way for the rich to avoid taxes.

Question 15

A fair game is a game in which the chances are 50-50 that you win or lose.

Accepted Answer

A) True 
 B)False

Question 16

A share of an oil company can be worth $10 with a probability of 0.50 and $20 with a probability of 0.50. What is the standard deviation of the price of this share?

Accepted Answer

A) 3 
B) 5 
C) 6 
D) 8.5 
A) 3 
B) 5 
C) 6 
D) 8.5

Question 17

Sports announcers often refer to a 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 18

If a person is entertained by gambling, then

Accepted Answer

A) she is not risk averse. 
B) she does not understand the concept of a fair game. 
C) she may gamble even if it is an unfair game. 
D) she will definitely not buy automobile insurance. 
A) she is not risk averse. 
B) she does not understand the concept of a fair game. 
C) she may gamble even if it is an unfair game. 
D) she will definitely not buy automobile insurance.

Question 19

If an individual makes her investment decisions based solely on the Net Present Value criterion, one can conclude that she is

Accepted Answer

A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely wealthy. 
A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely wealthy.

Question 20

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

Accepted Answer

A) Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks. 
B) Such flooding is diversifiable, but insurance company CEOs are more concerned with their stockholder wealth than the well-being of farmers. 
C) Such flooding is diversifiable, but the market for such insurance policies cannot clear without the assistance of the International Community. 
D) Such flooding is known to happen on a regular basis and therefore there is no "risk" to be insured against. 
A) Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks. 
B) Such flooding is diversifiable, but insurance company CEOs are more concerned with their stockholder wealth than the well-being of farmers. 
C) Such flooding is diversifiable, but the market for such insurance policies cannot clear without the assistance of the International Community. 
D) Such flooding is known to happen on a regular basis and therefore there is no "risk" to be insured against.

A share of a restaurant chain can be worth $2 with a probability of 0.40 and $10 with a probability of 0.60. What is the variance of the price of this share?

A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is

John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000. From this, we can conclude that John

Which of the following statements is CORRECT?

-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. If Bob could keep $50 with certainty, his utility would be

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT

A risk-averse investor will decide whether or not to invest by determining if the expected value of the investment if positive.

Usury laws result in banks making less credit available to lower-income households because

What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100, and 80% of the time returns $50? Explain.

-The above figure shows Bob's utility function, which is

Insurance companies do NOT cover losses that would

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

A stock mutual fund is generally

A fair game is a game in which the chances are 50-50 that you win or lose.

A share of an oil company can be worth $10 with a probability of 0.50 and $20 with a probability of 0.50. What is the standard deviation of the price of this share?

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

If a person is entertained by gambling, then

If an individual makes her investment decisions based solely on the Net Present Value criterion, one can conclude that she is

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

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

A share of a restaurant chain can be worth $2 with a probability of 0.40 and $10 with a probability of 0.60. What is the variance of the price of this share?

A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is

John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000. From this, we can conclude that John

Which of the following statements is CORRECT?

-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. If Bob could keep $50 with certainty, his utility would be

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT

A risk-averse investor will decide whether or not to invest by determining if the expected value of the investment if positive.

Usury laws result in banks making less credit available to lower-income households because

What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100, and 80% of the time returns $50? Explain.

-The above figure shows Bob's utility function, which is

Insurance companies do NOT cover losses that would

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

A stock mutual fund is generally

A fair game is a game in which the chances are 50-50 that you win or lose.

A share of an oil company can be worth $10 with a probability of 0.50 and $20 with a probability of 0.50. What is the standard deviation of the price of this share?

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

If a person is entertained by gambling, then

If an individual makes her investment decisions based solely on the Net Present Value criterion, one can conclude that she is

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

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