Question 1

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Accepted Answer

A) True 
 B)False

Question 2

Bob invests $75 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

Accepted Answer

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

Question 3

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

Accepted Answer

Most people are risk averse. They only m

Question 4

When insurance companies offer fair insurance,

Accepted Answer

A) risk-averse agents always purchase it. 
B) risk-neutral agents never purchase it. 
C) risk-loving agents always purchase it. 
D) nobody would purchase fair insurance. 
A) risk-averse agents always purchase it. 
B) risk-neutral agents never purchase it. 
C) risk-loving agents always purchase it. 
D) nobody would purchase fair insurance.

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. Over and above the price of fair insurance, what is the risk premium Bob would pay to eliminate the chance of theft?

Accepted Answer

A) $0 
B) $20 
C) $30 
D) $50 
A) $0 
B) $20 
C) $30 
D) $50

Question 6

A risk-neutral individual will make investment decisions purely based on net present value because

Accepted Answer

A) she doesn't care about utility. 
B) because utility is a linear function of wealth. 
C) she loves to take risk. 
D) net present value is always more than expected utility. 
A) she doesn't care about utility. 
B) because utility is a linear function of wealth. 
C) she loves to take risk. 
D) net present value is always more than expected utility.

Question 7

A stock mutual fund's primary advantage is to allow

Accepted Answer

A) investors to diversify away systematic risk. 
B) investors to diversify away all risk. 
C) investors to diversify away idiosyncratic risk. 
D) the rich to avoid taxes. 
A) investors to diversify away systematic risk. 
B) investors to diversify away all risk. 
C) investors to diversify away idiosyncratic risk. 
D) the rich to avoid taxes.

Question 8

Although he is very poor, Al plays the million-dollar lottery every day because he is certain that one day he will win. Al makes this calculation based upon

Accepted Answer

A) the frequency of past outcomes. 
B) subjective probability. 
C) knowledge of all possible outcomes. 
D) tossing a coin. 
A) the frequency of past outcomes. 
B) subjective probability. 
C) knowledge of all possible outcomes. 
D) tossing a coin.

Question 9

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda. In this case, politicians are often engaged in

Accepted Answer

A) the Allais effect. 
B) the Byrd effect. 
C) framing. 
D) prospect theory. 
A) the Allais effect. 
B) the Byrd effect. 
C) framing. 
D) prospect theory.

Question 10

On any given day, a salesman can earn $0 with a 30% probability, $100 with a 20% probability, or $300 with a 50% probability. His expected earnings equal

Accepted Answer

A) $0. 
B) $100. 
C) $150. 
D) $170. 
A) $0. 
B) $100. 
C) $150. 
D) $170.

Question 11

You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are

Accepted Answer

A) mutually exclusive. 
B) exhaustive. 
C) Both A and B. 
D) None of the above. 
A) mutually exclusive. 
B) exhaustive. 
C) Both A and B. 
D) None of the above.

Question 12

A rational person maximizes

Accepted Answer

A) risk. 
B) return. 
C) expected utility. 
D) return variance. 
A) risk. 
B) return. 
C) expected utility. 
D) return variance.

Question 13

According to prospect theory,

Accepted Answer

A) people are concerned with wealth levels only. 
B) people are concerned with changes in wealth levels only. 
C) people never use a reference level when making their decisions. 
D) everybody is risk-neutral. 
A) people are concerned with wealth levels only. 
B) people are concerned with changes in wealth levels only. 
C) people never use a reference level when making their decisions. 
D) everybody is risk-neutral.

Question 14

The ability of diversification to reduce risk

Accepted Answer

A) is greater the more negatively correlated the two events are. 
B) is greater the more positively correlated the two events are. 
C) is greater the more uncorrelated the two events are. 
D) is greater the more risk averse the individual is. 
A) is greater the more negatively correlated the two events are. 
B) is greater the more positively correlated the two events are. 
C) is greater the more uncorrelated the two events are. 
D) is greater the more risk averse the individual is.

Question 15

Which of the following games involving the roll of a single die is a fair bet?

Accepted Answer

A) Bet $1 and receive $1 if 3 or 4 comes up. 
B) Bet $1 and receive $1 if 3, 4, or 5 comes up. 
C) Bet $1 and receive $4 if 6 comes up. 
D) None of the bets is a fair bet. 
A) Bet $1 and receive $1 if 3 or 4 comes up. 
B) Bet $1 and receive $1 if 3, 4, or 5 comes up. 
C) Bet $1 and receive $4 if 6 comes up. 
D) None of the bets is a fair bet.

Question 16

A person is betting a coin will come up heads or tails. The coin always lands on one of these two outcomes. This person can bet to

Accepted Answer

A) eliminate only the systematic risk. 
B) eliminate only the random risk. 
C) eliminate all risk. 
D) All of the above. 
A) eliminate only the systematic risk. 
B) eliminate only the random risk. 
C) eliminate all risk. 
D) All of the above.

Question 17

Why would a usury law result in banks making less credit available to low-income households?

Accepted Answer

Without restrictions, banks would charge

Question 18

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno, NV will not net $10,000. The insurance company

Accepted Answer

A) will sell her an insurance policy because the proposal entails uncertainty not risk. 
B) will sell her an insurance policy because the proposal entails risk not uncertainty. 
C) will not sell her an insurance policy because the proposal entails uncertainty not risk. 
D) will not sell her an insurance policy because the proposal entails risk not uncertainty. 
A) will sell her an insurance policy because the proposal entails uncertainty not risk. 
B) will sell her an insurance policy because the proposal entails risk not uncertainty. 
C) will not sell her an insurance policy because the proposal entails uncertainty not risk. 
D) will not sell her an insurance policy because the proposal entails risk not uncertainty.

Question 19

A risk-neutral person will invest in a project by examining if

Accepted Answer

A) the expected utility associated with the project is positive. 
B) the marginal utility associated with the project is positive. 
C) the expected net present value is positive. 
D) All of the above. 
A) the expected utility associated with the project is positive. 
B) the marginal utility associated with the project is positive. 
C) the expected net present value is positive. 
D) All of the above.

Question 20

Steven currently has wealth of $10,000. He is risk averse about losing any of his wealth, but risk loving about adding to his wealth. Draw his utility function.

Accepted Answer

@#IMG-DLM& See the a

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Bob invests $75 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

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

When insurance companies offer fair insurance,

-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. Over and above the price of fair insurance, what is the risk premium Bob would pay to eliminate the chance of theft?

A risk-neutral individual will make investment decisions purely based on net present value because

A stock mutual fund's primary advantage is to allow

Although he is very poor, Al plays the million-dollar lottery every day because he is certain that one day he will win. Al makes this calculation based upon

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda. In this case, politicians are often engaged in

On any given day, a salesman can earn $0 with a 30% probability, $100 with a 20% probability, or $300 with a 50% probability. His expected earnings equal

You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are

A rational person maximizes

According to prospect theory,

The ability of diversification to reduce risk

Which of the following games involving the roll of a single die is a fair bet?

A person is betting a coin will come up heads or tails. The coin always lands on one of these two outcomes. This person can bet to

Why would a usury law result in banks making less credit available to low-income households?

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno, NV will not net $10,000. The insurance company

A risk-neutral person will invest in a project by examining if

Steven currently has wealth of $10,000. He is risk averse about losing any of his wealth, but risk loving about adding to his wealth. Draw his utility function.

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

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Bob invests $75 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

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

When insurance companies offer fair insurance,

-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. Over and above the price of fair insurance, what is the risk premium Bob would pay to eliminate the chance of theft?

A risk-neutral individual will make investment decisions purely based on net present value because

A stock mutual fund's primary advantage is to allow

Although he is very poor, Al plays the million-dollar lottery every day because he is certain that one day he will win. Al makes this calculation based upon

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda. In this case, politicians are often engaged in

On any given day, a salesman can earn $0 with a 30% probability, $100 with a 20% probability, or $300 with a 50% probability. His expected earnings equal

You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are

A rational person maximizes

According to prospect theory,

The ability of diversification to reduce risk

Which of the following games involving the roll of a single die is a fair bet?

A person is betting a coin will come up heads or tails. The coin always lands on one of these two outcomes. This person can bet to

Why would a usury law result in banks making less credit available to low-income households?

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno, NV will not net $10,000. The insurance company

A risk-neutral person will invest in a project by examining if

Steven currently has wealth of $10,000. He is risk averse about losing any of his wealth, but risk loving about adding to his wealth. Draw his utility function.

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