Question 1

Fair insurance

Accepted Answer

A)  has an expected value for the policy holder of zero. 
B)  has a positive expected value for the insurance company. 
C)  has very high insurance premiums. 
D)  is available only to those who fully insure. 
A)  has an expected value for the policy holder of zero. 
B)  has a positive expected value for the insurance company. 
C)  has very high insurance premiums. 
D)  is available only to those who fully insure. A

Question 2

Expected value represents

Accepted Answer

A)  the actual payment one expects to receive. 
B)  the average of all payments one would receive if one undertook the risky event many times. 
C)  the payment one receives if he or she makes the correct decision. 
D)  the payment that is most likely to occur. 
A)  the actual payment one expects to receive. 
B)  the average of all payments one would receive if one undertook the risky event many times. 
C)  the payment one receives if he or she makes the correct decision. 
D)  the payment that is most likely to occur. B

Question 3

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Accepted Answer

A)  his utility function is convex. 
B)  he has negative marginal utility of wealth. 
C)  he is willing to pay a premium to avoid a risky situation. 
D)  All of the above. 
A)  his utility function is convex. 
B)  he has negative marginal utility of wealth. 
C)  he is willing to pay a premium to avoid a risky situation. 
D)  All of the above. C

Question 4

Someone who is risk-averse has

Accepted Answer

A)  diminishing marginal utility of wealth. 
B)  constant marginal utility of wealth. 
C)  increasing marginal utility of wealth. 
D)  less marginal utility of wealth than someone who is risk-neutral. 
A)  diminishing marginal utility of wealth. 
B)  constant marginal utility of wealth. 
C)  increasing marginal utility of wealth. 
D)  less marginal utility of wealth than someone who is risk-neutral.

Question 5

A risk-neutral person will invest in a project by examining if

Accepted Answer

A)  the expected utility associated with the project is positive. 
B)  the marginal utility associated with the project is positive. 
C)  the expected value is positive. 
D)  All of the above. 
A)  the expected utility associated with the project is positive. 
B)  the marginal utility associated with the project is positive. 
C)  the expected value is positive. 
D)  All of the above.

Question 6

If two events are positively correlated but not perfectly correlated,then

Accepted Answer

A)  diversification is not necessary since there is no risk. 
B)  diversification eliminates all risk. 
C)  diversification does not reduce risk at all. 
D)  diversification can reduce risk. 
A)  diversification is not necessary since there is no risk. 
B)  diversification eliminates all risk. 
C)  diversification does not reduce risk at all. 
D)  diversification can reduce risk.

Question 7

A risk-preferring person is willing to pay

Accepted Answer

A)  a risk premium. 
B)  a fee to make a fair bet. 
C)  to obtain decreasing marginal utility. 
D)  None of the above. 
A)  a risk premium. 
B)  a fee to make a fair bet. 
C)  to obtain decreasing marginal utility. 
D)  None of the above.

Question 8

One aspect of prospect theory is that people tend to

Accepted Answer

A)  be very risk averse to large gains. 
B)  be very risk averse to losses. 
C)  love losses more than gains. 
D)  hate gains regardless of potential losses. 
A)  be very risk averse to large gains. 
B)  be very risk averse to losses. 
C)  love losses more than gains. 
D)  hate gains regardless of potential losses.

Question 9

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

Accepted Answer

A)  $0. 
B)  $100 because that is the most likely outcome. 
C)  $100 because that is what he will earn on average. 
D)  $200 because that is what he will earn on average. 
A)  $0. 
B)  $100 because that is the most likely outcome. 
C)  $100 because that is what he will earn on average. 
D)  $200 because that is what he will earn on average.

Question 10

A lottery game pays $500 with .001 probability and $0 otherwise.The variance of the payout is

Accepted Answer

A)  15.8. 
B)  249.50. 
C)  249.75. 
D)  499. 
A)  15.8. 
B)  249.50. 
C)  249.75. 
D)  499.

Question 11

Rahul has a concave utility function.Therefore,if there are two choices he will pick the ________ if ________ expected value.

Accepted Answer

A)  fair bet; both have the same 
B)  less risky choice;both have the same 
C)  more risky choice; both have the same 
D)  less risky choice; it has a lower 
A)  fair bet; both have the same 
B)  less risky choice;both have the same 
C)  more risky choice; both have the same 
D)  less risky choice; it has a lower

Question 12

If fair insurance is offered to a risk-averse person,she will

Accepted Answer

A)  buy enough insurance to eliminate all risk. 
B)  not buy any insurance because it is overpriced. 
C)  not buy any insurance since the marginal utility of the amount of the payment is positive. 
D)  buy enough insurance to cover about half of the possible loss. 
A)  buy enough insurance to eliminate all risk. 
B)  not buy any insurance because it is overpriced. 
C)  not buy any insurance since the marginal utility of the amount of the payment is positive. 
D)  buy enough insurance to cover about half of the possible loss.

Question 13

The certainty effect shows that

Accepted Answer

A)  people are overconfident about their choices. 
B)  people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is lower. 
C)  people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is higher. 
D)  people prefer certain outcomes to uncertain outcomes even when the expected values are the same. 
A)  people are overconfident about their choices. 
B)  people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is lower. 
C)  people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is higher. 
D)  people prefer certain outcomes to uncertain outcomes even when the expected values are the same.

Question 14

A stock mutual fund is generally

Accepted Answer

A)  less risky than buying individual stocks. 
B)  more risky than buying individual stocks. 
C)  just as risky as buying individual stocks. 
D)  a way for the rich to avoid taxes. 
A)  less risky than buying individual stocks. 
B)  more risky than buying individual stocks. 
C)  just as risky as buying individual stocks. 
D)  a way for the rich to avoid taxes.

Question 15

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is NOT

Accepted Answer

A)  risk preferring. 
B)  risk neutral. 
C)  risk averse. 
D)  rational. 
A)  risk preferring. 
B)  risk neutral. 
C)  risk averse. 
D)  rational.

Question 16

If outcomes are ________,exactly one of the outcomes will occur and the probabilities add up to ________.

Accepted Answer

A)  probabilistic; between 0 and 1 
B)  exhaustive and mutually exclusive; 1 
C)  exhaustive; 1 
D)  mutually exclusive; between 0 and 1 
A)  probabilistic; between 0 and 1 
B)  exhaustive and mutually exclusive; 1 
C)  exhaustive; 1 
D)  mutually exclusive; between 0 and 1

Question 17

A jar has 20 red jelly beans and 40 black jelly beans.If you pick a red jelly bean and put it back,what are the odds of picking a black jelly bean next?

Accepted Answer

A)  20/40 
B)  20/60 
C)  40/60 
D)  1 (100%) 
A)  20/40 
B)  20/60 
C)  40/60 
D)  1 (100%)

Question 18

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

Accepted Answer

A)  Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks. 
B)  Such flooding is diversifiable, but insurance company CEOs are more concerned with their stock-holder wealth than the well-being of farmers. 
C)  Such flooding is diversifiable, but the market for such insurance policies cannot clear without the assistance of the International Community. 
D)  Such flooding is known to happen on a regular basis and therefore there is no "risk" to be insured against. 
A)  Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks. 
B)  Such flooding is diversifiable, but insurance company CEOs are more concerned with their stock-holder wealth than the well-being of farmers. 
C)  Such flooding is diversifiable, but the market for such insurance policies cannot clear without the assistance of the International Community. 
D)  Such flooding is known to happen on a regular basis and therefore there is no "risk" to be insured against.

Question 19

Expected utility is

Accepted Answer

A)  the maximum utility that a person can get from a set of possible outcomes. 
B)  the probability-weighted mean of the utility gained from a set of possible outcomes. 
C)  negative for risk-averse people. 
D)  indeterminant for risk preferring people. 
A)  the maximum utility that a person can get from a set of possible outcomes. 
B)  the probability-weighted mean of the utility gained from a set of possible outcomes. 
C)  negative for risk-averse people. 
D)  indeterminant for risk preferring people.

Question 20

A person who is risk-neutral will

Accepted Answer

A)  pay a small risk premium when making a choice. 
B)  pick a slightly less risky option with a slightly lower expected value. 
C)  pick the option with the highest expected value. 
D)  None of the above. 
A)  pay a small risk premium when making a choice. 
B)  pick a slightly less risky option with a slightly lower expected value. 
C)  pick the option with the highest expected value. 
D)  None of the above.

Fair insurance

Expected value represents

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Someone who is risk-averse has

A risk-neutral person will invest in a project by examining if

If two events are positively correlated but not perfectly correlated,then

A risk-preferring person is willing to pay

One aspect of prospect theory is that people tend to

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

A lottery game pays $500 with .001 probability and $0 otherwise.The variance of the payout is

Rahul has a concave utility function.Therefore,if there are two choices he will pick the if expected value.

If fair insurance is offered to a risk-averse person,she will

The certainty effect shows that

A stock mutual fund is generally

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is NOT

If outcomes are ,exactly one of the outcomes will occur and the probabilities add up to .

A jar has 20 red jelly beans and 40 black jelly beans.If you pick a red jelly bean and put it back,what are the odds of picking a black jelly bean next?

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

Expected utility is

A person who is risk-neutral will

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters

Exam 14: Managerial Decision-Making Under Uncertainty

Fair insurance

Expected value represents

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Someone who is risk-averse has

A risk-neutral person will invest in a project by examining if

If two events are positively correlated but not perfectly correlated,then

A risk-preferring person is willing to pay

One aspect of prospect theory is that people tend to

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

A lottery game pays $500 with .001 probability and $0 otherwise.The variance of the payout is

Rahul has a concave utility function.Therefore,if there are two choices he will pick the ________ if ________ expected value.

If fair insurance is offered to a risk-averse person,she will

The certainty effect shows that

A stock mutual fund is generally

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is NOT

If outcomes are ________,exactly one of the outcomes will occur and the probabilities add up to ________.

A jar has 20 red jelly beans and 40 black jelly beans.If you pick a red jelly bean and put it back,what are the odds of picking a black jelly bean next?

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

Expected utility is

A person who is risk-neutral will

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters

Rahul has a concave utility function.Therefore,if there are two choices he will pick the if expected value.

If outcomes are ,exactly one of the outcomes will occur and the probabilities add up to .