Question 1

Diminishing marginal utility of wealth leads to risk aversion because at a given level of wealth a dollar gained

Accepted Answer

A)  is worth more in additional utility than a dollar lost. 
B)  is worth less in additional utility than a dollar lost. 
C)  is worth as much in additional utility as a dollar lost. 
D)  does not add to total utility. 
A)  is worth more in additional utility than a dollar lost. 
B)  is worth less in additional utility than a dollar lost. 
C)  is worth as much in additional utility as a dollar lost. 
D)  does not add to total utility.

Question 2

Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. If there is a sudden and unexpected increase in risk, who gains?

Accepted Answer

A)  insurance companies 
B)  the government of Somalia 
C)  boat owners who are insured with policies whose price cannot be changed 
D)  pirates 
A)  insurance companies 
B)  the government of Somalia 
C)  boat owners who are insured with policies whose price cannot be changed 
D)  pirates

Question 3

Suppose that there are only two types of used cars, peaches and lemons and that used cars are pure experience goods. Peaches are worth $10,000, and lemons are worth $6,000. Three fourths of all used cars are peaches, and one fourth are lemons. In a market with no signals, for instance, a market without warranties, the average value of cars actually sold will be

Accepted Answer

A)  $6,000. 
B)  $7,000. 
C)  $9,000. 
D)  $10,000. 
A)  $6,000. 
B)  $7,000. 
C)  $9,000. 
D)  $10,000.

Question 4

Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn't cover the debt. Federally regulated lenders must have mortgage insurance on loans where the buyer's down payment is less than 20 per cent of the price. In this example, what signal do potential homeowners give to indicate they are low-risk?

Accepted Answer

A)  indicating high income 
B)  buying an expensive home 
C)  having a large down payment 
D)  buying an inexpensive home 
A)  indicating high income 
B)  buying an expensive home 
C)  having a large down payment 
D)  buying an inexpensive home

Question 5

-George is considering investing in a frozen yogurt store. If the store does well he will make $20,0000, but if the store does poorly he will make only $10,000. There is a 50 percent chance of each outcome. His utility of wealth schedule is in the above table. The expected utility of this investment is

Accepted Answer

A)  115. 
B)  140. 
C)  165. 
D)  180. 
A)  115. 
B)  140. 
C)  165. 
D)  180.

Question 6

Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease

Accepted Answer

A)  by more than 300. 
B)  by less than 300. 
C)  by 300. 
D)  by some amount that cannot be determined without more information. 
A)  by more than 300. 
B)  by less than 300. 
C)  by 300. 
D)  by some amount that cannot be determined without more information.

Question 7

Moral hazard and adverse selection are the result of

Accepted Answer

A)  poorly functioning markets. 
B)  government intervention. 
C)  private information. 
D)  treachery. 
A)  poorly functioning markets. 
B)  government intervention. 
C)  private information. 
D)  treachery.

Question 8

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000, and there is a 25 percent chance that he could lose it all. If an insurance company offers to insure against this loss for $6,000, John will

Accepted Answer

A)  buy the policy. 
B)  not buy the policy. 
C)  be indifferent between being insured and uninsured. 
D)  There is not enough information to answer. 
A)  buy the policy. 
B)  not buy the policy. 
C)  be indifferent between being insured and uninsured. 
D)  There is not enough information to answer.

Question 9

Consider a market for used cars. Suppose there are only two kinds of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What kind of cars (lemons, good cars, or both) are traded? Explain and substantiate your answer.

Accepted Answer

Because buyers can't tell the difference

Question 10

-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. Andrew will accept the offer that

Accepted Answer

A)  maximizes his expected income. 
B)  maximizes his expected utility. 
C)  maximizes both his expected income and expected utility. 
D)  has the highest weighted average of income and utility. 
A)  maximizes his expected income. 
B)  maximizes his expected utility. 
C)  maximizes both his expected income and expected utility. 
D)  has the highest weighted average of income and utility.

Question 11

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected utility of wealth?

Accepted Answer

A)  between 0 and 200 
B)  245 
C)  270 
D)  between 287 and 300 
A)  between 0 and 200 
B)  245 
C)  270 
D)  between 287 and 300

Question 12

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected utility?

Accepted Answer

A)  100 
B)  90 
C)  50 
D)  zero 
A)  100 
B)  90 
C)  50 
D)  zero

Question 13

-Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

Accepted Answer

A)  diminishes 
B)  is constant 
C)  increases 
D)  increases first and then diminishes 
A)  diminishes 
B)  is constant 
C)  increases 
D)  increases first and then diminishes

Question 14

Expected utility is a weighted average in which the weights are

Accepted Answer

A)  average incomes. 
B)  marginal incomes. 
C)  total incomes. 
D)  probabilities. 
A)  average incomes. 
B)  marginal incomes. 
C)  total incomes. 
D)  probabilities.

Question 15

-Bobby is offered two fulltime jobs. In the first job, as a salesperson, he has a 50 percent chance to make $2,000 a month and a 50 percent chance to make $10,000 a month. The second job, as a construction worker, pays $4,500 a month with certainty. Bobby's utility of wealth curve is shown in the figure above. Bobby will take the ________ job because his expected ________ from this job is greater.

Accepted Answer

A)  first; utility 
B)  second; utility 
C)  second; income 
D)  first; income 
A)  first; utility 
B)  second; utility 
C)  second; income 
D)  first; income

Question 16

Of the following, the best example of private information is when

Accepted Answer

A)  Michael knows the price of a gallon of milk at the minimart but Michelle doesn't know. 
B)  you know some of your used car's defects but a potential buyer cannot find out about them until after buying. 
C)  you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. 
D)  you pay the owner of a used car a little extra and she lets you know all of the car's defects. 
A)  Michael knows the price of a gallon of milk at the minimart but Michelle doesn't know. 
B)  you know some of your used car's defects but a potential buyer cannot find out about them until after buying. 
C)  you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. 
D)  you pay the owner of a used car a little extra and she lets you know all of the car's defects.

Question 17

Private information

Accepted Answer

A)  creates moral hazard but eliminates adverse selection. 
B)  creates adverse selection but eliminates moral hazard. 
C)  creates both moral hazard and adverse selection. 
D)  eliminates both moral hazard and adverse selection. 
A)  creates moral hazard but eliminates adverse selection. 
B)  creates adverse selection but eliminates moral hazard. 
C)  creates both moral hazard and adverse selection. 
D)  eliminates both moral hazard and adverse selection.

Question 18

Consider a market for used cars. Suppose there are only two kind of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer.

Accepted Answer

Because buyers can't tell the difference

Question 19

The use of incentive payments for salespeople combats

Accepted Answer

A)  both adverse selection and moral hazard. 
B)  neither adverse selection nor moral hazard. 
C)  adverse selection but not moral hazard. 
D)  moral hazard but not adverse selection. 
A)  both adverse selection and moral hazard. 
B)  neither adverse selection nor moral hazard. 
C)  adverse selection but not moral hazard. 
D)  moral hazard but not adverse selection.

Question 20

-Nancy's utility of wealth curve is given in the above figure. She is faced with a risky proposition which yields an income of $50 one-third of the time, $100 one-third of the time, and $150 one-third of the time. Her expected utility is

Accepted Answer

A)  100. 
B)  140. 
C)  150. 
D)  420. 
A)  100. 
B)  140. 
C)  150. 
D)  420.

Diminishing marginal utility of wealth leads to risk aversion because at a given level of wealth a dollar gained

Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. If there is a sudden and unexpected increase in risk, who gains?

Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease

Moral hazard and adverse selection are the result of

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000, and there is a 25 percent chance that he could lose it all. If an insurance company offers to insure against this loss for $6,000, John will

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected utility?

-Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

Expected utility is a weighted average in which the weights are

Of the following, the best example of private information is when

Private information

The use of incentive payments for salespeople combats

-Nancy's utility of wealth curve is given in the above figure. She is faced with a risky proposition which yields an income of $50 one-third of the time, $100 one-third of the time, and $150 one-third of the time. Her expected utility is

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

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Exam 20: Uncertainty and Information

Diminishing marginal utility of wealth leads to risk aversion because at a given level of wealth a dollar gained

Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. If there is a sudden and unexpected increase in risk, who gains?

Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease

Moral hazard and adverse selection are the result of

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000, and there is a 25 percent chance that he could lose it all. If an insurance company offers to insure against this loss for $6,000, John will

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected utility?

-Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

Expected utility is a weighted average in which the weights are

Of the following, the best example of private information is when

Private information

The use of incentive payments for salespeople combats

-Nancy's utility of wealth curve is given in the above figure. She is faced with a risky proposition which yields an income of $50 one-third of the time, $100 one-third of the time, and $150 one-third of the time. Her expected utility is

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