Question 1

The assumption that the marginal utility of wealth diminishes implies that

Accepted Answer

A)  total utility falls when wealth increases. 
B)  the marginal utility of wealth is negative. 
C)  total utility increases with wealth and each additional unit of wealth increases total utility by a smaller amount. 
D)  total utility increases with wealth and each additional unit of wealth increases total utility by the same amount. 
A)  total utility falls when wealth increases. 
B)  the marginal utility of wealth is negative. 
C)  total utility increases with wealth and each additional unit of wealth increases total utility by a smaller amount. 
D)  total utility increases with wealth and each additional unit of wealth increases total utility by the same amount.

Question 2

In the market for automobile insurance, adverse selection implies that

Accepted Answer

A)  drivers with greater risks want to buy a policy without deductibles. 
B)  drivers with greater risks want to buy a policy with large deductibles. 
C)  uninsured drivers will drive recklessly. 
D)  insured drivers will drive recklessly. 
A)  drivers with greater risks want to buy a policy without deductibles. 
B)  drivers with greater risks want to buy a policy with large deductibles. 
C)  uninsured drivers will drive recklessly. 
D)  insured drivers will drive recklessly.

Question 3

-Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Of the following, what minimum salary raise (if any) should Lucy's current employer offer her to persuade her to stay?

Accepted Answer

A)  No raise is necessary as Lucy is better off with her current salary than with her expected income as a realtor. 
B)  $8,000 
C)  $5,000 
D)  $3,000 
A)  No raise is necessary as Lucy is better off with her current salary than with her expected income as a realtor. 
B)  $8,000 
C)  $5,000 
D)  $3,000

Question 4

The used car market without warranties suffers from

Accepted Answer

A)  perfect competition. 
B)  oligopoly. 
C)  adverse selection and moral hazard. 
D)  excessive signaling. 
A)  perfect competition. 
B)  oligopoly. 
C)  adverse selection and moral hazard. 
D)  excessive signaling.

Question 5

Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to

Accepted Answer

A)  reduce moral hazard. 
B)  reduce adverse selection. 
C)  increase moral hazard. 
D)  increase adverse selection. 
A)  reduce moral hazard. 
B)  reduce adverse selection. 
C)  increase moral hazard. 
D)  increase adverse selection.

Question 6

Option A provides $9,000 with probability 50 percent or $11,000 with probability 50 percent. Option B provides $8,000 with probability 50 percent or $12,000 with probability 50 percent. For most people the cost of risk associated with B is

Accepted Answer

A)  less than that associated with A. 
B)  the same as that associated with A. 
C)  exactly twice that associated with A. 
D)  more than twice that associated with A. 
A)  less than that associated with A. 
B)  the same as that associated with A. 
C)  exactly twice that associated with A. 
D)  more than twice that associated with A.

Question 7

-Nancy's utility of wealth curve is given in the above figure. Option A gives Nancy $100 for sure. Option B gives Nancy $50 half the time and $150 half the time. Nancy's expected utility of option A

Accepted Answer

A)  is greater than the expected utility of option B. 
B)  is the same as the expected utility of option B. 
C)  is less than the expected utility of option B. 
D)  could be either greater or less than the expected utility of option B. 
A)  is greater than the expected utility of option B. 
B)  is the same as the expected utility of option B. 
C)  is less than the expected utility of option B. 
D)  could be either greater or less than the expected utility of option B.

Question 8

A risk averse person's utility of wealth curve has a

Accepted Answer

A)  positive slope and becomes steeper to the right. 
B)  positive slope and becomes flatter to the right. 
C)  negative slope and becomes steeper to the right. 
D)  negative slope and becomes flatter to the right. 
A)  positive slope and becomes steeper to the right. 
B)  positive slope and becomes flatter to the right. 
C)  negative slope and becomes steeper to the right. 
D)  negative slope and becomes flatter to the right.

Question 9

Dan has a car valued at $10,000 that gives him a utility of 50 units. There is a 10 percent chance that he will have an accident that will make his car worthless, in which case his utility will be zero. His utility from a wealth of $7,000 is 45 units. The maximum amount Dan will be willing to pay for car insurance is

Accepted Answer

A)  $1,000. 
B)  $3,000. 
C)  $7,000. 
D)  zero. 
A)  $1,000. 
B)  $3,000. 
C)  $7,000. 
D)  zero.

Question 10

Even if your college degree is irrelevant to an employer's needs, your high GPA might still get you the job because

Accepted Answer

A)  the firm is not a profit maximizer. 
B)  your GPA sends a signal about your quality as a worker. 
C)  the firm will most likely make an adverse selection. 
D)  the high GPA eliminates the possibility of moral hazard. 
A)  the firm is not a profit maximizer. 
B)  your GPA sends a signal about your quality as a worker. 
C)  the firm will most likely make an adverse selection. 
D)  the high GPA eliminates the possibility of moral hazard.

Question 11

-Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

Accepted Answer

A)  option A: $300 with certainty. 
B)  option B: 50 percent chance of $200 and 50 percent chance of $400. 
C)  option C: 50 percent chance of $200 and 50 percent chance of $700. 
D)  option D: 90 percent chance of $400 and 10 percent chance of $0. 
A)  option A: $300 with certainty. 
B)  option B: 50 percent chance of $200 and 50 percent chance of $400. 
C)  option C: 50 percent chance of $200 and 50 percent chance of $700. 
D)  option D: 90 percent chance of $400 and 10 percent chance of $0.

Question 12

-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, what is the value of insurance against the theft?

Accepted Answer

A)  $0 
B)  $5,000 
C)  $7,000 
D)  $13,000 
A)  $0 
B)  $5,000 
C)  $7,000 
D)  $13,000

Question 13

-Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. Her utility of wealth curve is shown in the figure above. What minimum fixed salary should another employer offer Adriana to persuade her to work for his firm?

Accepted Answer

A)  $1,001 
B)  $2,001 
C)  $3,001 
D)  $4,501 
A)  $1,001 
B)  $2,001 
C)  $3,001 
D)  $4,501

Question 14

Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to

Accepted Answer

A)  reduce moral hazard. 
B)  reduce adverse selection. 
C)  increase moral hazard. 
D)  increase adverse selection. 
A)  reduce moral hazard. 
B)  reduce adverse selection. 
C)  increase moral hazard. 
D)  increase adverse selection.

Question 15

-Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Given the nature of Andrew's job offers and his utility of wealth schedule, Andrew will

Accepted Answer

A)  accept the offer to work as a server. 
B)  accept the offer to work as a cook. 
C)  be indifferent between working as a cook or a server. 
D)  be unable to reach a decision about which offer to accept. 
A)  accept the offer to work as a server. 
B)  accept the offer to work as a cook. 
C)  be indifferent between working as a cook or a server. 
D)  be unable to reach a decision about which offer to accept.

Question 16

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected income from taking this job?

Accepted Answer

A)  $100 
B)  $350 
C)  $475 
D)  $600 
A)  $100 
B)  $350 
C)  $475 
D)  $600

Question 17

-Ashton has the utility of wealth curve shown in the above figure. Ashton owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. Suppose all sports cars owners are like Ashton. An insurance company agrees to pay each person who has an accident the full value of their car. The company's operating expenses are $1,000. What is the minimum insurance premium that the company is willing to accept?

Accepted Answer

A)  $3,000 per year 
B)  $6,000 per year 
C)  $10,000 per year 
D)  $15,000 per year 
A)  $3,000 per year 
B)  $6,000 per year 
C)  $10,000 per year 
D)  $15,000 per year

Question 18

Dan, age 19, may have trouble buying insurance at a low price because

Accepted Answer

A)  the insurance company has private information that he is a risky driver. 
B)  the insurance company has private information that his signals are valid. 
C)  insurance companies fear that he has private information that his deductible is too high. 
D)  insurance companies fear that he has private information that he is a risky driver. 
A)  the insurance company has private information that he is a risky driver. 
B)  the insurance company has private information that his signals are valid. 
C)  insurance companies fear that he has private information that his deductible is too high. 
D)  insurance companies fear that he has private information that he is a risky driver.

Question 19

If buyers cannot assess the quality of used cars but there are warranties for cars

Accepted Answer

A)  too few lemons are sold. 
B)  too many good used cars are sold. 
C)  good used cars are sold at a higher price than lemons. 
D)  there is an adverse selection problem. 
A)  too few lemons are sold. 
B)  too many good used cars are sold. 
C)  good used cars are sold at a higher price than lemons. 
D)  there is an adverse selection problem.

Question 20

If Shaniq is a risk averse, then

Accepted Answer

A)  her cost of risk exceeds $0. 
B)  she has diminishing marginal utility of wealth. 
C)  she is willing to buy insurance if the cost of insurance is low enough. 
D)  all of the above. 
A)  her cost of risk exceeds $0. 
B)  she has diminishing marginal utility of wealth. 
C)  she is willing to buy insurance if the cost of insurance is low enough. 
D)  all of the above.

The assumption that the marginal utility of wealth diminishes implies that

In the market for automobile insurance, adverse selection implies that

The used car market without warranties suffers from

Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to

Option A provides $9,000 with probability 50 percent or $11,000 with probability 50 percent. Option B provides $8,000 with probability 50 percent or $12,000 with probability 50 percent. For most people the cost of risk associated with B is

-Nancy's utility of wealth curve is given in the above figure. Option A gives Nancy $100 for sure. Option B gives Nancy $50 half the time and $150 half the time. Nancy's expected utility of option A

A risk averse person's utility of wealth curve has a

Even if your college degree is irrelevant to an employer's needs, your high GPA might still get you the job because

-Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, what is the value of insurance against the theft?

Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to

Dan, age 19, may have trouble buying insurance at a low price because

If buyers cannot assess the quality of used cars but there are warranties for cars

If Shaniq is a risk averse, then

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters

Exam 20: Uncertainty and Information

The assumption that the marginal utility of wealth diminishes implies that

In the market for automobile insurance, adverse selection implies that

The used car market without warranties suffers from

Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to

Option A provides $9,000 with probability 50 percent or $11,000 with probability 50 percent. Option B provides $8,000 with probability 50 percent or $12,000 with probability 50 percent. For most people the cost of risk associated with B is

-Nancy's utility of wealth curve is given in the above figure. Option A gives Nancy $100 for sure. Option B gives Nancy $50 half the time and $150 half the time. Nancy's expected utility of option A

A risk averse person's utility of wealth curve has a

Even if your college degree is irrelevant to an employer's needs, your high GPA might still get you the job because

-Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, what is the value of insurance against the theft?

Travel insurance (which pays a traveler if the traveler needs to cancel his or her trip) has a clause that states it will not pay if the trip is cancelled because of a pre-existing condition. If sick people are more likely to purchase travel insurance, this clause is meant to

Dan, age 19, may have trouble buying insurance at a low price because

If buyers cannot assess the quality of used cars but there are warranties for cars

If Shaniq is a risk averse, then

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters