Question 1

Large firms that can take on a number of small investment projects whose returns are independent of each other would most likely be characterized as:

Accepted Answer

A) risk-averse, because large firms do not like to take any risk. 
B) risk-neutral, because each investment project is small relative to the total and firms are incentivized to maximize profits. 
C) risk-loving, because there are a lot of benefits to being the biggest and most powerful firm. 
D) risk-gaining, because there are a lot of benefits to being the biggest and most powerful firm. 
A) risk-averse, because large firms do not like to take any risk. 
B) risk-neutral, because each investment project is small relative to the total and firms are incentivized to maximize profits. 
C) risk-loving, because there are a lot of benefits to being the biggest and most powerful firm. 
D) risk-gaining, because there are a lot of benefits to being the biggest and most powerful firm.

Question 2

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is $U = \sqrt { I }$ what is the risk premium associated with this choice?

Accepted Answer

A) $1.59 
B) $2.52 
C) $0 
D) $3.95 
A) $1.59 
B) $2.52 
C) $0 
D) $3.95

Question 3

Asymmetric information refers to:

Accepted Answer

A) bad information. 
B) incomplete information. 
C) misleading information. 
D) differences in the amount of information the parties have. 
A) bad information. 
B) incomplete information. 
C) misleading information. 
D) differences in the amount of information the parties have.

Question 4

Use the following decision tree to answer the next question.
  
-In the decision tree above, for what probability of Event 1 will Decision 1 and Decision 2 have the same expected value?

Accepted Answer

A) 0.24 
B) 0.36 
C) 0.44 
D) 0.56 
A) 0.24 
B) 0.36 
C) 0.44 
D) 0.56

Question 5

Consider a fairly-priced insurance policy that fully indemnifies the purchaser against their loss. This insurance policy would most likely be purchased by:

Accepted Answer

A) a risk-loving decision maker. 
B) a risk-neutral decision maker. 
C) a risk-averse decision maker. 
D) all decision makers. 
A) a risk-loving decision maker. 
B) a risk-neutral decision maker. 
C) a risk-averse decision maker. 
D) all decision makers.

Question 6

Which of the following statements is incorrect?

Accepted Answer

A) A risk-averse decision maker will choose the alternative with the lowest variance among alternatives with identical expected utilities. 
B) A risk-neutral decision maker will always choose the alternative with the lowest variance among alternatives with identical expected utilities. 
C) A risk-loving decision maker will choose the alternative with the highest variance among alternatives with identical expected utilities. 
D) The expected utility of a lottery is the expected value of the utility levels that the decision maker receives from the payoffs in the lottery. 
A) A risk-averse decision maker will choose the alternative with the lowest variance among alternatives with identical expected utilities. 
B) A risk-neutral decision maker will always choose the alternative with the lowest variance among alternatives with identical expected utilities. 
C) A risk-loving decision maker will choose the alternative with the highest variance among alternatives with identical expected utilities. 
D) The expected utility of a lottery is the expected value of the utility levels that the decision maker receives from the payoffs in the lottery.

Question 7

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 variance of this lottery is what?

Accepted Answer

A) 4.5 
B) 9.0 
C) 13.5 
D) 18.0 
A) 4.5 
B) 9.0 
C) 13.5 
D) 18.0

Question 8

Use the following probability distribution for a lottery to answer this question.  
-Given the probability distribution for the lottery above, what is the expected value of this lottery?

Accepted Answer

A) $83 
B) $71 
C) $68 
D) $65 
A) $83 
B) $71 
C) $68 
D) $65

Question 9

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%
  
-*If the cost of obtaining information to determine Event 1 and Event 2 is $5, what is the value of perfect information?

Accepted Answer

A) -1.96 
B) 0 
C) 3.04 
D) 5 
A) -1.96 
B) 0 
C) 3.04 
D) 5

Question 10

$$\text { A decision maker has a utility function } U = I ^ { 2 } + 500 \text {. This decision maker is: }$$

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 11

A decision maker has a utility function U = 10I. 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

Would you expect an insurance company in the "real world" to sell an insurance policy for exactly the "fairly-priced" level as defined in the text?

Accepted Answer

A) Yes, because the fairly-priced insurance policy includes some profit for the insurance company. 
B) Yes, because insurance companies are required to sell their policy at the fairly-priced level by law. 
C) Probably not, because the expected value of profits for the insurance company would be zero. 
D) Probably not, because insurance companies are not in a competitive industry and are able to earn monopoly profits. 
A) Yes, because the fairly-priced insurance policy includes some profit for the insurance company. 
B) Yes, because insurance companies are required to sell their policy at the fairly-priced level by law. 
C) Probably not, because the expected value of profits for the insurance company would be zero. 
D) Probably not, because insurance companies are not in a competitive industry and are able to earn monopoly profits.

Question 13

-Suppose you purchase a collectible baseball card from an acquaintance for $50. You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability. What is your expected value for the baseball card?

Accepted Answer

A) $150 
B) $100 
C) $1000 
D) $50 
A) $150 
B) $100 
C) $1000 
D) $50

Question 14

Adverse selection 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 insured party driving faster than an uninsured party. 
C) an applicant lying on their application form about their health history. 
D) an insured driver using the car to conduct driving lessons for new learners. 
A) an auto owner failing to maintain the car, increasing the likelihood of an accident. 
B) an insured party driving faster than an uninsured party. 
C) an applicant lying on their application form about their health history. 
D) an insured driver using the car to conduct driving lessons for new learners.

Question 15

A risk-averse decision maker will choose the alternative with the lowest variance among alternatives with identical expected utilities.

Accepted Answer

A) True 
 B)False

Question 16

The variance of a lottery is:

Accepted Answer

A) the average payoff you would get from the lottery if the lottery were repeated many times. 
B) the sum of the probability-weighted squared deviations of the possible outcomes of the lottery. 
C) a measure of risk preference. 
D) the amount an agent would be willing to pay to enter a lottery. 
A) the average payoff you would get from the lottery if the lottery were repeated many times. 
B) the sum of the probability-weighted squared deviations of the possible outcomes of the lottery. 
C) a measure of risk preference. 
D) the amount an agent would be willing to pay to enter a lottery.

Question 17

What would be the expected value, variance and standard deviation of an event that always took the value one as its outcome?

Accepted Answer

A) 1, 1, 1 
B) 1, 0, 1 
C) 1, 0, 0 
D) 1, 1, 0 
A) 1, 1, 1 
B) 1, 0, 1 
C) 1, 0, 0 
D) 1, 1, 0

Question 18

A fairly-priced insurance policy is one in which:

Accepted Answer

A) the insurance premium is equal to the expected value of the promised insurance payment. 
B) the insurance premium is equal to the expected value of the promised insurance payment plus a small profit for the insurance company. 
C) the insurance premium is equal to the variance of the expected value of the promised insurance payment. 
D) the insurance premium is equal to the variance of the expected value of the promised insurance payment plus a small profit for the insurance company. 
A) the insurance premium is equal to the expected value of the promised insurance payment. 
B) the insurance premium is equal to the expected value of the promised insurance payment plus a small profit for the insurance company. 
C) the insurance premium is equal to the variance of the expected value of the promised insurance payment. 
D) the insurance premium is equal to the variance of the expected value of the promised insurance payment plus a small profit for the insurance company.

Question 19

An English auction is an auction wherein:

Accepted Answer

A) the price called out continues to descend until someone is willing to pay that price. 
B) participants cry out their bids and the bids keep rising until no participant is willing to pay a higher price for the object being sold. 
C) bids are sealed and the individual with the highest bid wins. 
D) bids are sealed and everyone with a price higher than the reservation price wins. 
A) the price called out continues to descend until someone is willing to pay that price. 
B) participants cry out their bids and the bids keep rising until no participant is willing to pay a higher price for the object being sold. 
C) bids are sealed and the individual with the highest bid wins. 
D) bids are sealed and everyone with a price higher than the reservation price wins.

Question 20

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. If this policy is priced at $40, what is the change in your expected utility if you purchase the policy rather than no insurance?

Accepted Answer

A) 1 
B) 0.8 
C) 0.2 
D) 0 
A) 1 
B) 0.8 
C) 0.2 
D) 0

Large firms that can take on a number of small investment projects whose returns are independent of each other would most likely be characterized as:

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is $U = \sqrt { I }$ what is the risk premium associated with this choice?

Asymmetric information refers to:

Use the following decision tree to answer the next question. -In the decision tree above, for what probability of Event 1 will Decision 1 and Decision 2 have the same expected value?

Consider a fairly-priced insurance policy that fully indemnifies the purchaser against their loss. This insurance policy would most likely be purchased by:

Which of the following statements is incorrect?

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 variance of this lottery is what?

Use the following probability distribution for a lottery to answer this question. -Given the probability distribution for the lottery above, what is the expected value of this lottery?

$\text { A decision maker has a utility function } U = I ^ { 2 } + 500 \text {. This decision maker is: }$

A decision maker has a utility function U = 10I. This decision maker is:

Would you expect an insurance company in the "real world" to sell an insurance policy for exactly the "fairly-priced" level as defined in the text?

-Suppose you purchase a collectible baseball card from an acquaintance for $50. You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability. What is your expected value for the baseball card?

Adverse selection in auto insurance might refer to:

A risk-averse decision maker will choose the alternative with the lowest variance among alternatives with identical expected utilities.

The variance of a lottery is:

What would be the expected value, variance and standard deviation of an event that always took the value one as its outcome?

A fairly-priced insurance policy is one in which:

An English auction is an auction wherein:

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

Large firms that can take on a number of small investment projects whose returns are independent of each other would most likely be characterized as:

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is U=IU = \sqrt { I }U=I​ what is the risk premium associated with this choice?

Asymmetric information refers to:

Use the following decision tree to answer the next question. -In the decision tree above, for what probability of Event 1 will Decision 1 and Decision 2 have the same expected value?

Consider a fairly-priced insurance policy that fully indemnifies the purchaser against their loss. This insurance policy would most likely be purchased by:

Which of the following statements is incorrect?

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 variance of this lottery is what?

Use the following probability distribution for a lottery to answer this question. -Given the probability distribution for the lottery above, what is the expected value of this lottery?

A decision maker has a utility function U=I2+500. This decision maker is: \text { A decision maker has a utility function } U = I ^ { 2 } + 500 \text {. This decision maker is: } A decision maker has a utility function U=I2+500. This decision maker is:

A decision maker has a utility function U = 10I. This decision maker is:

Would you expect an insurance company in the "real world" to sell an insurance policy for exactly the "fairly-priced" level as defined in the text?

-Suppose you purchase a collectible baseball card from an acquaintance for $50. You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability. What is your expected value for the baseball card?

Adverse selection in auto insurance might refer to:

A risk-averse decision maker will choose the alternative with the lowest variance among alternatives with identical expected utilities.

The variance of a lottery is:

What would be the expected value, variance and standard deviation of an event that always took the value one as its outcome?

A fairly-priced insurance policy is one in which:

An English auction is an auction wherein:

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

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is $U = \sqrt { I }$ what is the risk premium associated with this choice?

$\text { A decision maker has a utility function } U = I ^ { 2 } + 500 \text {. This decision maker is: }$