Question 1

A good way to deal with moral hazard faced by an insurance company would be to:

Accepted Answer

A) fully indemnify its policy holders. 
B) require applicants to take a physical examination. 
C) require policy holders to pay a deductible. 
D) conduct detailed investigations of every accident. 
A) fully indemnify its policy holders. 
B) require applicants to take a physical examination. 
C) require policy holders to pay a deductible. 
D) conduct detailed investigations of every accident.

Question 2

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 decision maker chooses Decision A and Event 1 occurs, which decision alternative should the decision maker choose at node D?

Accepted Answer

A) Decision 1 
B) Decision 2 
C) Either Decision; they both have the same expected value. 
D) Neither Decision; more information is needed. 
A) Decision 1 
B) Decision 2 
C) Either Decision; they both have the same expected value. 
D) Neither Decision; more information is needed.

Question 3

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 decision maker chooses Decision A and Event 2 occurs, which decision alternative should the decision maker choose at node E?

Accepted Answer

A) Decision 1 
B) Decision 2 
C) Either Decision; they both have the same expected value. 
D) Neither Decision; more information is needed. 
A) Decision 1 
B) Decision 2 
C) Either Decision; they both have the same expected value. 
D) Neither Decision; more information is needed.

Question 4

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 fair price of this policy?

Accepted Answer

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

Question 5

Given the possible outcomes to a lottery being only the values 2, 6 with equal probabilities, calculate the expected value, variance and standard deviation?

Accepted Answer

A) EV = 4, variance = 16, standard deviation = 4 
B) EV = 4, variance = 4, standard deviation = 2 
C) EV = 4, variance = 4, standard deviation = 4 
D) EV = 3.5, variance = 4, standard deviation = 2 
A) EV = 4, variance = 16, standard deviation = 4 
B) EV = 4, variance = 4, standard deviation = 2 
C) EV = 4, variance = 4, standard deviation = 4 
D) EV = 3.5, variance = 4, standard deviation = 2

Question 6

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 decision maker chooses Decision B, which decision alternative should the decision maker choose at node C?

Accepted Answer

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

Question 7

-The variance of a probability distribution can be described as:

Accepted Answer

A) a measure of the riskiness of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
B) a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes times two. 
C) a measure of the amplitude of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
D) a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes. 
A) a measure of the riskiness of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
B) a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes times two. 
C) a measure of the amplitude of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
D) a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes.

Question 8

With common values in an auction:

Accepted Answer

A) each bidder has his own personalized valuation of an object. 
B) no bidder knows how much the object is worth to the other bidders. 
C) the object has the same value to all bidders. 
D) individuals are likely to have idiosyncratic assessments of the value of the object. 
A) each bidder has his own personalized valuation of an object. 
B) no bidder knows how much the object is worth to the other bidders. 
C) the object has the same value to all bidders. 
D) individuals are likely to have idiosyncratic assessments of the value of the object.

Question 9

-Given the probability distribution for the lottery above, what is the standard deviation of this lottery?

Accepted Answer

A) 2,401 
B) 2,116 
C) 49 
D) 46 
A) 2,401 
B) 2,116 
C) 49 
D) 46

Question 10

The probability of any particular outcome is between 0 and 1.

Accepted Answer

A) True 
 B)False

Question 11

The expected value 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 individual 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 individual would be willing to pay to enter a lottery.

Question 12

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%
  
-*What is the expected value at node B?

Accepted Answer

A) 18.60 
B) 16.04 
C) 13.76 
D) 12.50 
A) 18.60 
B) 16.04 
C) 13.76 
D) 12.50

Question 13

A person who gets increasing marginal utility as income increases is described as:

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 14

Which of the following statements is false?

Accepted Answer

A) Some probabilities result from laws of nature; some reflect subjective beliefs about risky events. 
B) The probability of any particular outcome is between 0 and 1. 
C) The sum of the probabilities of all possible outcomes can exceed one. 
D) The sum of the probabilities of all possible outcomes must equal exactly one. 
A) Some probabilities result from laws of nature; some reflect subjective beliefs about risky events. 
B) The probability of any particular outcome is between 0 and 1. 
C) The sum of the probabilities of all possible outcomes can exceed one. 
D) The sum of the probabilities of all possible outcomes must equal exactly one.

Question 15

In a second-price sealed-bid auction the best bidding strategy is to bid:

Accepted Answer

A) your maximum willingness to pay for the object. 
B) the value of the second highest bidder since this gives you the highest probability of winning while maximizing your surplus. 
C) something less than your maximum willingness to pay, although how much less depends on a variety of factors. 
D) continuing bidding until you win if you like the object. 
A) your maximum willingness to pay for the object. 
B) the value of the second highest bidder since this gives you the highest probability of winning while maximizing your surplus. 
C) something less than your maximum willingness to pay, although how much less depends on a variety of factors. 
D) continuing bidding until you win if you like the object.

Question 16

In a first-price sealed-bid auction when bidders have private values, the best bidding strategy is to bid:

Accepted Answer

A) your value for the object since this gives you the highest probability of winning the auction. 
B) the value of the second highest bidder since this gives you the highest probability of winning while maximizing your surplus. 
C) something less than your maximum willingness to pay, although how much less depends on a variety of factors. 
D) continuing bidding until you win if you like the object. 
A) your value for the object since this gives you the highest probability of winning the auction. 
B) the value of the second highest bidder since this gives you the highest probability of winning while maximizing your surplus. 
C) something less than your maximum willingness to pay, although how much less depends on a variety of factors. 
D) continuing bidding until you win if you like the object.

Question 17

A good way to deal with adverse selection faced by an insurance company would not be to:

Accepted Answer

A) fully indemnify its policy holders. 
B) require applicants to take a physical examination. 
C) require policy holders to pay a deductible. 
D) insure groups of individuals (such as all employees of a particular firm). 
A) fully indemnify its policy holders. 
B) require applicants to take a physical examination. 
C) require policy holders to pay a deductible. 
D) insure groups of individuals (such as all employees of a particular firm).

Question 18

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 , what is the risk premium associated with this choice?

Accepted Answer

A) $0 
B) $1 
C) $2 
D) $3 
A) $0 
B) $1 
C) $2 
D) $3

Question 19

A decision maker can be described with utility which is only a function of income and which exhibits diminishing marginal utility of income. 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 20

A decision maker can be described with utility that is only a function of income. If this function is linear, the 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.

A good way to deal with moral hazard faced by an insurance company would be to:

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 fair price of this policy?

Given the possible outcomes to a lottery being only the values 2, 6 with equal probabilities, calculate the expected value, variance and standard deviation?

-The variance of a probability distribution can be described as:

With common values in an auction:

-Given the probability distribution for the lottery above, what is the standard deviation of this lottery?

The probability of any particular outcome is between 0 and 1.

The expected value of a lottery is:

A person who gets increasing marginal utility as income increases is described as:

Which of the following statements is false?

In a second-price sealed-bid auction the best bidding strategy is to bid:

In a first-price sealed-bid auction when bidders have private values, the best bidding strategy is to bid:

A good way to deal with adverse selection faced by an insurance company would not be to:

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 , what is the risk premium associated with this choice?

A decision maker can be described with utility which is only a function of income and which exhibits diminishing marginal utility of income. This decision maker is:

A decision maker can be described with utility that is only a function of income. If this function is linear, the decision maker 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

A good way to deal with moral hazard faced by an insurance company would be to:

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=IU = \sqrt { I }U=I​ ,where I is income. What is the fair price of this policy?

Given the possible outcomes to a lottery being only the values 2, 6 with equal probabilities, calculate the expected value, variance and standard deviation?

-The variance of a probability distribution can be described as:

With common values in an auction:

-Given the probability distribution for the lottery above, what is the standard deviation of this lottery?

The probability of any particular outcome is between 0 and 1.

The expected value of a lottery is:

A person who gets increasing marginal utility as income increases is described as:

Which of the following statements is false?

In a second-price sealed-bid auction the best bidding strategy is to bid:

In a first-price sealed-bid auction when bidders have private values, the best bidding strategy is to bid:

A good way to deal with adverse selection faced by an insurance company would not be to:

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 , what is the risk premium associated with this choice?

A decision maker can be described with utility which is only a function of income and which exhibits diminishing marginal utility of income. This decision maker is:

A decision maker can be described with utility that is only a function of income. If this function is linear, the decision maker 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

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 fair price of this policy?