Question 1

For the following, please answer "True" or "False" and explain why.
-If a person is risk averse,then she has negative marginal utility of wealth.

Accepted Answer

A) True 
 B)False

Question 2

If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is

Accepted Answer

A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  extremely wealthy. 
A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  extremely wealthy.

Question 3

Many people do not fully insure against risk because

Accepted Answer

A)  they are risk averse. 
B)  the insurance companies are all crooks. 
C)  the insurance offered is less than fair. 
D)  the insurance offered is more than fair. 
A)  they are risk averse. 
B)  the insurance companies are all crooks. 
C)  the insurance offered is less than fair. 
D)  the insurance offered is more than fair.

Question 4

Johnny owns a house that would cost $100,000 to replace should it ever be destroyed by fire.There is a 0.1% chance that the house could be destroyed during the course of a year.Johnny's utility function is ?U = W⁰.⁵.How much would fair insurance cost that completely replaces the house if destroyed by fire? Assuming that Johnny has no other wealth,how much would Johnny be willing to pay for such an insurance policy? Why the difference?

Accepted Answer

Fair insurance would cost (0.001 ∗ $100,

Question 5

If Ann's utility function is U = W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her expected utility is

Accepted Answer

A)  80. 
B)  76. 
C)  64. 
D)  60. 
A)  80. 
B)  76. 
C)  64. 
D)  60.

Question 6

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 net present 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 net present value is positive. 
D)  All of the above.

Question 7

If a person is entertained by gambling,then

Accepted Answer

A)  she is not risk averse. 
B)  she does not understand the concept of a fair game. 
C)  she may gamble even if it is an unfair game. 
D)  she will definitely not buy automobile insurance. 
A)  she is not risk averse. 
B)  she does not understand the concept of a fair game. 
C)  she may gamble even if it is an unfair game. 
D)  she will definitely not buy automobile insurance.

Question 8

The Friedman-Savage utility function can explain why

Accepted Answer

A)  people buy automobile insurance. 
B)  somebody becomes addicted to gambling. 
C)  people become more risk averse as their wealth increases. 
D)  people place small bets to have a chance at winning a large amount. 
A)  people buy automobile insurance. 
B)  somebody becomes addicted to gambling. 
C)  people become more risk averse as their wealth increases. 
D)  people place small bets to have a chance at winning a large amount.

Question 9

For the utility function U = Wᵃ,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

Accepted Answer

0 < a < 1 implies ri

Question 10

If Ann's utility function is U =3W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her Arrow-Pratt measure of risk aversion is

Accepted Answer

A)  0.5/w. 
B)  1/w. 
C)  1.5w. 
D)  3/w. 
A)  0.5/w. 
B)  1/w. 
C)  1.5w. 
D)  3/w.

Question 11

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

Question 12

If there are 10,000 people in your age bracket,and 10 of them died last year,an insurance company believes that the probability of someone in that age bracket dying this year would be

Accepted Answer

A)  0. 
B)  .001. 
C)  .0001. 
D)  1,000. 
A)  0. 
B)  .001. 
C)  .0001. 
D)  1,000.

Question 13

Which of the following is a property of an S-shaped curve that corresponds to the prospect theory value function?

Accepted Answer

A)  The curve passes through the reference point at the origin. 
B)  Both sections of the curve are convex to the horizontal, outcome axis. 
C)  The curve is symmetric with respect to gains and losses. 
D)  None of the above. 
A)  The curve passes through the reference point at the origin. 
B)  Both sections of the curve are convex to the horizontal, outcome axis. 
C)  The curve is symmetric with respect to gains and losses. 
D)  None of the above.

Question 14

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 15

16.2 Attitudes Toward Risk
  
-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

Accepted Answer

A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  risk premium. 
A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  risk premium.

Question 16

16.2 Attitudes Toward Risk
  
-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.To reduce the chance of theft to zero,Bob is willing to pay

Accepted Answer

A)  $20. 
B)  $50. 
C)  $70. 
D)  $80. 
A)  $20. 
B)  $50. 
C)  $70. 
D)  $80.

Question 17

16.2 Attitudes Toward Risk
  
-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.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Accepted Answer

A)  $0. 
B)  $20. 
C)  $30. 
D)  $50. 
A)  $0. 
B)  $20. 
C)  $30. 
D)  $50.

Question 18

Which of the following losses to an individual would an insurance company NOT cover?

Accepted Answer

A)  The person's automobile is stolen. 
B)  Fire destroys the person's home. 
C)  The person's father dies. 
D)  The person's country is invaded. 
A)  The person's automobile is stolen. 
B)  Fire destroys the person's home. 
C)  The person's father dies. 
D)  The person's country is invaded.

Question 19

The ability of diversification to reduce risk

Accepted Answer

A)  is greater the more negatively correlated the two events are. 
B)  is greater the more positively correlated the two events are. 
C)  is greater the more uncorrelated the two events are. 
D)  is greater the more risk averse the individual is. 
A)  is greater the more negatively correlated the two events are. 
B)  is greater the more positively correlated the two events are. 
C)  is greater the more uncorrelated the two events are. 
D)  is greater the more risk averse the individual is.

Question 20

A risk-neutral individual will make investment decisions purely based on net present value because

Accepted Answer

A)  she doesn't care about utility. 
B)  because utility is a linear function of wealth. 
C)  she loves to take risk. 
D)  net present value is always more than expected utility. 
A)  she doesn't care about utility. 
B)  because utility is a linear function of wealth. 
C)  she loves to take risk. 
D)  net present value is always more than expected utility.

For the following, please answer "True" or "False" and explain why. -If a person is risk averse,then she has negative marginal utility of wealth.

If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is

Many people do not fully insure against risk because

If Ann's utility function is U = W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her expected utility is

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

If a person is entertained by gambling,then

The Friedman-Savage utility function can explain why

For the utility function U = Wᵃ,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

If Ann's utility function is U =3W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her Arrow-Pratt measure of risk aversion is

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 there are 10,000 people in your age bracket,and 10 of them died last year,an insurance company believes that the probability of someone in that age bracket dying this year would be

Which of the following is a property of an S-shaped curve that corresponds to the prospect theory value function?

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

16.2 Attitudes Toward Risk -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

16.2 Attitudes Toward Risk -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.To reduce the chance of theft to zero,Bob is willing to pay

16.2 Attitudes Toward Risk -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.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Which of the following losses to an individual would an insurance company NOT cover?

The ability of diversification to reduce risk

A risk-neutral individual will make investment decisions purely based on net present value because

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters

Exam 16: Uncertainty

For the following, please answer "True" or "False" and explain why. -If a person is risk averse,then she has negative marginal utility of wealth.

If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is

Many people do not fully insure against risk because

If Ann's utility function is U = W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her expected utility is

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

If a person is entertained by gambling,then

The Friedman-Savage utility function can explain why

For the utility function U = Wᵃ,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

If Ann's utility function is U =3W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her Arrow-Pratt measure of risk aversion is

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 there are 10,000 people in your age bracket,and 10 of them died last year,an insurance company believes that the probability of someone in that age bracket dying this year would be

Which of the following is a property of an S-shaped curve that corresponds to the prospect theory value function?

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

16.2 Attitudes Toward Risk -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

16.2 Attitudes Toward Risk -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.To reduce the chance of theft to zero,Bob is willing to pay

16.2 Attitudes Toward Risk -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.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Which of the following losses to an individual would an insurance company NOT cover?

The ability of diversification to reduce risk

A risk-neutral individual will make investment decisions purely based on net present value because

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters