Question 1

Moral hazard in auto insurance might refer to:

Accepted Answer

A) an auto owner failing to maintain the car, increasing the likelihood of an accident. 
B) an applicant withholding information from the insurance company about the likelihood of having an accident. 
C) an applicant lying on their application form about their health history. 
D) an applicant having more cars than they announce when they complete their application. 
A) an auto owner failing to maintain the car, increasing the likelihood of an accident. 
B) an applicant withholding information from the insurance company about the likelihood of having an accident. 
C) an applicant lying on their application form about their health history. 
D) an applicant having more cars than they announce when they complete their application. A

Question 2

In economics, a lottery is:

Accepted Answer

A) the likelihood that a particular outcome occurs. 
B) a depiction of all possible outcomes of an event and their associated probabilities. 
C) any event for which the outcome is uncertain. 
D) a measure of risk associated with some event. 
A) the likelihood that a particular outcome occurs. 
B) a depiction of all possible outcomes of an event and their associated probabilities. 
C) any event for which the outcome is uncertain. 
D) a measure of risk associated with some event. C

Question 3

In general, with a first-price sealed-bid auction with private values, the Nash equilibrium bids will:

Accepted Answer

A) increase as the number of bidders goes up. 
B) decrease as the number of bidders goes up. 
C) not be affected by the number of bidders in the auction. 
D) decrease at a rate of 1/N where N is the number of bidders in the auction. 
A) increase as the number of bidders goes up. 
B) decrease as the number of bidders goes up. 
C) not be affected by the number of bidders in the auction. 
D) decrease at a rate of 1/N where N is the number of bidders in the auction. A

Question 4

The sum of the probabilities of all possible outcomes can exceed one.

Accepted Answer

A) True 
 B)False

Question 5

Use the following decision tree to answer the next question.
  
-Consider the decision tree above. If the probability of Event 1 is 30% and the probability of Event 2 is 70%, which decision alternative should the decision maker choose?

Accepted Answer

A) Decision 1 
B) Decision 2 
C) Either decision; they both have the same expected value. 
D) Neither; more information is needed to make an accurate assessment. 
A) Decision 1 
B) Decision 2 
C) Either decision; they both have the same expected value. 
D) Neither; more information is needed to make an accurate assessment.

Question 6

An auction in which participants cry out their bids, and each participant can increase his bid until the auction ends with the highest bidder winning the object is known as:

Accepted Answer

A) an English auction. 
B) first-price sealed-bid auction. 
C) second-price sealed-bid auction. 
D) Dutch ascending auction. 
A) an English auction. 
B) first-price sealed-bid auction. 
C) second-price sealed-bid auction. 
D) Dutch ascending auction.

Question 7

Heading: Analyzing Risky Decisions
**Reference: Use the decision tree along with the given probabilities to answer the next six questions 
Probability Event A = 30% Probability Event B = 70%
Probability Event 1 = 58% Probability Event 2 = 42%
Probability of Event A given that Event 1 occurs = 16%
Probability of Event B given that Event 1 occurs = 84%
Probability of Event A given that Event 2 occurs = 50%
Probability of Event B given that Event 2 occurs = 50%
  
-*At node A, which decision has the higher expected value?

Accepted Answer

A) Decision A 
B) Decision B 
C) Either decision; they both have the same expected value. 
D) Neither decision; more information is needed. 
A) Decision A 
B) Decision B 
C) Either decision; they both have the same expected value. 
D) Neither decision; more information is needed.

Question 8

Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The expected value of this lottery is what?

Accepted Answer

A) $30 
B) $65 
C) $130 
D) $260 
A) $30 
B) $65 
C) $130 
D) $260

Question 9

A risk premium is:

Accepted Answer

A) a payment to an insurer by a policy-holder who faces a potential loss. 
B) equal to the purchase price of an insurance policy. 
C) the necessary difference between the expected value of a lottery and the payoff of a sure thing to make the decision maker indifferent between the lottery and the sure thing. 
D) the difference between the expected value and the variance of a lottery. 
A) a payment to an insurer by a policy-holder who faces a potential loss. 
B) equal to the purchase price of an insurance policy. 
C) the necessary difference between the expected value of a lottery and the payoff of a sure thing to make the decision maker indifferent between the lottery and the sure thing. 
D) the difference between the expected value and the variance of a lottery.

Question 10

Some probabilities result from laws of nature; some reflect subjective beliefs about risky events.

Accepted Answer

A) True 
 B)False

Question 11

$$\text { A decision maker has a utility function } U = \sqrt { I } \text {. This decision maker is: }$$

Accepted Answer

A) risk-averse. 
B) risk-neutral. 
C) risk-loving. 
D) risk-gaining. 
A) risk-averse. 
B) risk-neutral. 
C) risk-loving. 
D) risk-gaining.

Question 12

Consider a lottery with four possible outcomes, $\mathrm { A } , \mathrm { B } , \mathrm { C }$, and $\mathrm { D }$. The associated payoffs are: $\mathrm { A }$ $\$ 10 , \mathrm {~B} - \$ 30 , \mathrm { C } - \$ 70$, and D - $\$ 150$. The probabilities are $P ( A ) = 0.40 , P ( B ) = 0.20 , P ( C ) =$ $0.30$, and $P ( D ) = 0.10$. The variance of this lottery is what?

Accepted Answer

A)  912 
B)  1,824 
C)  1,618 
D)  3,326 
A)  912 
B)  1,824 
C)  1,618 
D)  3,326

Question 13

Your current disposable income is $10,000. There is a 10% chance you will get in a serious car accident, incurring damage of $1,900. (There is a 90% chance that nothing will happen.)Your utility function is $U = \sqrt { I }$ ,where I is income. What is the most you would be willing to pay for this policy (rather than no insurance)?

Accepted Answer

A) $100 
B) $190 
C) $199 
D) $270 
A) $100 
B) $190 
C) $199 
D) $270

Question 14

Consider a lottery with four possible outcomes, $A , B , C$, and D. The associated payoffs are: $\$ 10$, $\$ 30 , \$ 70$, and $\$ 150$, respectively. The probabilities are $P ( A ) = 0.40 , P ( B ) = 0.20 , P ( C ) =$ $0.30$, and $P ( D ) = 0.10$. The expected value of this lottery is what?

Accepted Answer

A)  $\$ 23$ 
B)  $\$ 46$ 
C)  $\$ 65$ 
D)  $\$ 260$ 
A)  $\$ 23$ 
B)  $\$ 46$ 
C)  $\$ 65$ 
D)  $\$ 260$

Question 15

Use the following decision tree to answer the next question.
  
-If the probability of Event 1 is 30% and the probability of Event 2 is 70% in the decision tree above, the expected value of Decision 1 is

Accepted Answer

A) -10 
B) 30 
C) 14.5 
D) 18 
A) -10 
B) 30 
C) 14.5 
D) 18

Question 16

The winner's curse refers to:

Accepted Answer

A) bidding an amount higher than your maximum willingness to pay in an effort to 'win' in a private values auction. 
B) winning a private values auction and later determining that you bid more than you had really intended to. 
C) winning a common values auction and bidding more than the object is worth. 
D) winning an item in a common values auction that you don't really want. 
A) bidding an amount higher than your maximum willingness to pay in an effort to 'win' in a private values auction. 
B) winning a private values auction and later determining that you bid more than you had really intended to. 
C) winning a common values auction and bidding more than the object is worth. 
D) winning an item in a common values auction that you don't really want.

Question 17

In a second-price sealed-bid auction with private values, the winner of the auction is:

Accepted Answer

A) the second-highest bidder and pays the bid of the highest bidder. 
B) the second-highest bidder and pays the bid of the third-highest bidder. 
C) the highest-bidder and pays the bid of the second-highest bidder. 
D) the highest-bidder and pays the amount they bid. 
A) the second-highest bidder and pays the bid of the highest bidder. 
B) the second-highest bidder and pays the bid of the third-highest bidder. 
C) the highest-bidder and pays the bid of the second-highest bidder. 
D) the highest-bidder and pays the amount they bid.

Question 18

Suppose a fair, two-sided coin is flipped. If it comes up heads you receive $5; if it comes up tails you lose $1. The expected value of this lottery is what?

Accepted Answer

A) $2 
B) $3 
C) $4 
D) $5 
A) $2 
B) $3 
C) $4 
D) $5

Question 19

Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The variance of this lottery is what?

Accepted Answer

A) 2,875 
B) 5,750 
C) 8,625 
D) 11,500 
A) 2,875 
B) 5,750 
C) 8,625 
D) 11,500

Question 20

Consider an insurance policy with $15,000 worth of coverage. If there is a 10% chance the owner of the policy will file a claim for the $15,000 (and a 90% chance they will not file a claim), a fair price for this policy is:

Accepted Answer

A) $1,000 
B) $1,500 
C) $13,000 
D) $13,500 
A) $1,000 
B) $1,500 
C) $13,000 
D) $13,500

Moral hazard in auto insurance might refer to:

In economics, a lottery is:

In general, with a first-price sealed-bid auction with private values, the Nash equilibrium bids will:

The sum of the probabilities of all possible outcomes can exceed one.

Use the following decision tree to answer the next question. -Consider the decision tree above. If the probability of Event 1 is 30% and the probability of Event 2 is 70%, which decision alternative should the decision maker choose?

An auction in which participants cry out their bids, and each participant can increase his bid until the auction ends with the highest bidder winning the object is known as:

Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The expected value of this lottery is what?

A risk premium is:

Some probabilities result from laws of nature; some reflect subjective beliefs about risky events.

$\text { A decision maker has a utility function } U = \sqrt { I } \text {. This decision maker is: }$

Consider a lottery with four possible outcomes, $A , B , C$ , and D. The associated payoffs are: $\$ 10$ , $\$ 30 , \$ 70$ , and $\$ 150$ , respectively. The probabilities are $P ( A ) = 0.40 , P ( B ) = 0.20 , P ( C ) =$ $0.30$ , and $P ( D ) = 0.10$ . The expected value of this lottery is what?

Use the following decision tree to answer the next question. -If the probability of Event 1 is 30% and the probability of Event 2 is 70% in the decision tree above, the expected value of Decision 1 is

The winner's curse refers to:

In a second-price sealed-bid auction with private values, the winner of the auction is:

Suppose a fair, two-sided coin is flipped. If it comes up heads you receive $5; if it comes up tails you lose $1. The expected value of this lottery is what?

Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The variance of this lottery is what?

Consider an insurance policy with $15,000 worth of coverage. If there is a 10% chance the owner of the policy will file a claim for the $15,000 (and a 90% chance they will not file a claim), a fair price for this policy is:

Analyzing Economic Problems

Demand and Supply Analysis

Consumer Preferences and the Concept of Utility

Consumer Choice

The Theory of Demand

Inputs and Production Functions

Costs and Cost Minimization

Cost Curves

Perfectly Competitive Markets

Competitive Markets: Applications

Monopoly and Monopsony

Capturing Surplus

Market Structure and Competition

Game Theory and Strategic Behavior

General Equilibrium Theory

Externalities and Public Goods

Filters

Exam 15: Risk and Information

Moral hazard in auto insurance might refer to:

In economics, a lottery is:

In general, with a first-price sealed-bid auction with private values, the Nash equilibrium bids will:

The sum of the probabilities of all possible outcomes can exceed one.

Use the following decision tree to answer the next question. -Consider the decision tree above. If the probability of Event 1 is 30% and the probability of Event 2 is 70%, which decision alternative should the decision maker choose?

An auction in which participants cry out their bids, and each participant can increase his bid until the auction ends with the highest bidder winning the object is known as:

Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The expected value of this lottery is what?

A risk premium is:

Some probabilities result from laws of nature; some reflect subjective beliefs about risky events.

A decision maker has a utility function U=I. This decision maker is: \text { A decision maker has a utility function } U = \sqrt { I } \text {. This decision maker is: } A decision maker has a utility function U=I​. This decision maker is:

Use the following decision tree to answer the next question. -If the probability of Event 1 is 30% and the probability of Event 2 is 70% in the decision tree above, the expected value of Decision 1 is

The winner's curse refers to:

In a second-price sealed-bid auction with private values, the winner of the auction is:

Suppose a fair, two-sided coin is flipped. If it comes up heads you receive $5; if it comes up tails you lose $1. The expected value of this lottery is what?

Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The variance of this lottery is what?

Consider an insurance policy with $15,000 worth of coverage. If there is a 10% chance the owner of the policy will file a claim for the $15,000 (and a 90% chance they will not file a claim), a fair price for this policy is:

Analyzing Economic Problems

Demand and Supply Analysis

Consumer Preferences and the Concept of Utility

Consumer Choice

The Theory of Demand

Inputs and Production Functions

Costs and Cost Minimization

Cost Curves

Perfectly Competitive Markets

Competitive Markets: Applications

Monopoly and Monopsony

Capturing Surplus

Market Structure and Competition

Game Theory and Strategic Behavior

General Equilibrium Theory

Externalities and Public Goods

Filters

$\text { A decision maker has a utility function } U = \sqrt { I } \text {. This decision maker is: }$