Question 1

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. C

Question 2

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. C

Question 3

What is one reason car insurance seems much cheaper than health insurance?

Accepted Answer

A)  Health insurance entails more idiosyncratic than systematic risk, and therefore the gains to diversification are more dramatic. 
B)  Car insurance entails more systematic than idiosyncratic risk, and therefore the gains to diversification are more dramatic. 
C)  Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification. 
D)  Health insurance is manipulated through market power, and car insurance is not. 
A)  Health insurance entails more idiosyncratic than systematic risk, and therefore the gains to diversification are more dramatic. 
B)  Car insurance entails more systematic than idiosyncratic risk, and therefore the gains to diversification are more dramatic. 
C)  Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification. 
D)  Health insurance is manipulated through market power, and car insurance is not. C

Question 4

-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.

Question 5

A rational person maximizes

Accepted Answer

A)  risk. 
B)  return. 
C)  expected utility. 
D)  return variance. 
A)  risk. 
B)  return. 
C)  expected utility. 
D)  return variance.

Question 6

-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.Over and above the price of fair insurance,what is the risk premium Bob would pay to eliminate the chance of theft?

Accepted Answer

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

Question 7

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 8

For a risk-neutral person,the expected utility associated with various levels of wealth

Accepted Answer

A)  is above the person's utility function. 
B)  is below the person's utility function. 
C)  is equal to the person's utility function. 
D)  does not exist. 
A)  is above the person's utility function. 
B)  is below the person's utility function. 
C)  is equal to the person's utility function. 
D)  does not exist.

Question 9

If two events are perfectly positively 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 only cuts the risk in half. 
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 only cuts the risk in half.

Question 10

The expected utility theory

Accepted Answer

A)  predicts all actions involving uncertainty. 
B)  predicts no actions involving uncertainty. 
C)  predicts some, but not all, actions involving uncertainty. 
D)  predicts only one in three actions involving uncertainty. 
A)  predicts all actions involving uncertainty. 
B)  predicts no actions involving uncertainty. 
C)  predicts some, but not all, actions involving uncertainty. 
D)  predicts only one in three actions involving uncertainty.

Question 11

One reason health insurance is very expensive is because

Accepted Answer

A)  it is likely a nearly fair insurance policy. 
B)  it is subject to manipulation through market power. 
C)  the government doesn't regulate the industry enough. 
D)  it is likely an unfair insurance policy. 
A)  it is likely a nearly fair insurance policy. 
B)  it is subject to manipulation through market power. 
C)  the government doesn't regulate the industry enough. 
D)  it is likely an unfair insurance policy.

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

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.

Question 14

Insurance companies do NOT cover losses that would

Accepted Answer

A)  happen to all of the policyholders at once. 
B)  happen with a very low probability. 
C)  happen to just a handful of policyholders. 
D)  happen with uncertainty. 
A)  happen to all of the policyholders at once. 
B)  happen with a very low probability. 
C)  happen to just a handful of policyholders. 
D)  happen with uncertainty.

Question 15

Explain why the variance of an investment is a useful measure of the risk associated with it.

Accepted Answer

The variance provides a measure of the s

Question 16

Which of the following is a fair bet based on the toss of an unbiased coin?

Accepted Answer

A)  head: receive $5, tail: lose $5 
B)  head: receive $2, tail: lose $3 
C)  head: receive $0.5, tail: lose $1 
D)  head: lose $3, tail: lose $3 
A)  head: receive $5, tail: lose $5 
B)  head: receive $2, tail: lose $3 
C)  head: receive $0.5, tail: lose $1 
D)  head: lose $3, tail: lose $3

Question 17

Bob invests $25 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

Accepted Answer

A)  risk loving. 
B)  risk neutral. 
C)  risk averse. 
D)  Any one of the three above. 
A)  risk loving. 
B)  risk neutral. 
C)  risk averse. 
D)  Any one of the three above.

Question 18

The rate of return on bonds is lower than on stocks over time because

Accepted Answer

A)  bond holders cannot diversify. 
B)  bonds have a lower standard deviation in returns. 
C)  stocks have less non-diversifiable risks than bonds. 
D)  bonds are subject to more random risks than stocks. 
A)  bond holders cannot diversify. 
B)  bonds have a lower standard deviation in returns. 
C)  stocks have less non-diversifiable risks than bonds. 
D)  bonds are subject to more random risks than stocks.

Question 19

Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.

Accepted Answer

@#IMG-DLM& See the a

Question 20

A share of a restaurant chain can be worth $2 with a probability of 0.40 and $10 with a probability of 0.60.What is the variance of the price of this share?

Accepted Answer

A)  3 
B)  5 
C)  6 
D)  8.5 
A)  3 
B)  5 
C)  6 
D)  8.5

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

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

What is one reason car insurance seems much cheaper than health insurance?

-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

A rational person maximizes

-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.Over and above the price of fair insurance,what is the risk premium Bob would pay to eliminate the chance of theft?

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

For a risk-neutral person,the expected utility associated with various levels of wealth

If two events are perfectly positively correlated,then

The expected utility theory

One reason health insurance is very expensive is because

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

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

Insurance companies do NOT cover losses that would

Explain why the variance of an investment is a useful measure of the risk associated with it.

Which of the following is a fair bet based on the toss of an unbiased coin?

Bob invests $25 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

The rate of return on bonds is lower than on stocks over time because

Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.

A share of a restaurant chain can be worth $2 with a probability of 0.40 and $10 with a probability of 0.60.What is the variance of the price of this share?

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Externalities, Open-Access, and Public Goods

Asymmetric Information

Contracts and Moral Hazards

Filters

Exam 17: Uncertainty

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

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

What is one reason car insurance seems much cheaper than health insurance?

-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

A rational person maximizes

-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.Over and above the price of fair insurance,what is the risk premium Bob would pay to eliminate the chance of theft?

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

For a risk-neutral person,the expected utility associated with various levels of wealth

If two events are perfectly positively correlated,then

The expected utility theory

One reason health insurance is very expensive is because

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

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

Insurance companies do NOT cover losses that would

Explain why the variance of an investment is a useful measure of the risk associated with it.

Which of the following is a fair bet based on the toss of an unbiased coin?

Bob invests $25 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

The rate of return on bonds is lower than on stocks over time because

Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.

A share of a restaurant chain can be worth $2 with a probability of 0.40 and $10 with a probability of 0.60.What is the variance of the price of this share?

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Externalities, Open-Access, and Public Goods

Asymmetric Information

Contracts and Moral Hazards

Filters