Question 1

Bob invests $75 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)  irrational. 
A)  risk loving. 
B)  risk neutral. 
C)  risk averse. 
D)  irrational.

Question 2

Why would a usury law result in banks making less credit available to low-income households?

Accepted Answer

Without restrictions,banks would charge

Question 3

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 4

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 5

Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100; otherwise it is worth $0.There is 25% chance that any variety will be retired.For the purchase of an individual animal,what is the value to Sarah of knowing ahead of time whether or not that variety will be retired?

Accepted Answer

If Sarah did not know whether a variety

Question 6

Alvin's utility function is U = W.Barry's utility function is U = W2.Carl's utility function is U = W0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?

Accepted Answer

Carl's expected utility is (0.1 ∗ 1,000^0.5)

Question 7

If a person is risk averse,then she has negative marginal utility of wealth.

Accepted Answer

A) True 
 B)False

Question 8

-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's expected wealth is

Accepted Answer

A)  $0. 
B)  $50. 
C)  $75. 
D)  $100. 
A)  $0. 
B)  $50. 
C)  $75. 
D)  $100.

Question 9

Which of the following helps to reduce risk?

Accepted Answer

A)  Abstain from risk taking. 
B)  Obtain more information. 
C)  Diversify. 
D)  All of the above. 
A)  Abstain from risk taking. 
B)  Obtain more information. 
C)  Diversify. 
D)  All of the above.

Question 10

Although he is very poor,Al plays the million-dollar lottery every day because he is certain that one day he will win.Al makes this calculation based upon

Accepted Answer

A)  the frequency of past outcomes. 
B)  subjective probability. 
C)  knowledge of all possible outcomes. 
D)  tossing a coin. 
A)  the frequency of past outcomes. 
B)  subjective probability. 
C)  knowledge of all possible outcomes. 
D)  tossing a coin.

Question 11

In terms of the stock market,systematic risk refers to the fact that

Accepted Answer

A)  some stocks have higher returns than others. 
B)  some stocks' returns have a higher variance than others. 
C)  all stock prices are correlated with the health of the economy. 
D)  most stock prices are perfectly negatively correlated. 
A)  some stocks have higher returns than others. 
B)  some stocks' returns have a higher variance than others. 
C)  all stock prices are correlated with the health of the economy. 
D)  most stock prices are perfectly negatively correlated.

Question 12

Suppose a patent applicant approaches an insurance company and seeks to purchase an insurance policy that her patent will not net $1m in the next three years.The insurance company

Accepted Answer

A)  will sell her an insurance policy because the proposal entails uncertainty not risk. 
B)  will sell her an insurance policy because the proposal entails risk not uncertainty. 
C)  will not sell her an insurance policy because the proposal entails uncertainty not risk. 
D)  will not sell her an insurance policy because the proposal entails risk not uncertainty. 
A)  will sell her an insurance policy because the proposal entails uncertainty not risk. 
B)  will sell her an insurance policy because the proposal entails risk not uncertainty. 
C)  will not sell her an insurance policy because the proposal entails uncertainty not risk. 
D)  will not sell her an insurance policy because the proposal entails risk not uncertainty.

Question 13

People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?

Accepted Answer

A)  $0 
B)  $300 
C)  $3,000 
D)  $3,300 
A)  $0 
B)  $300 
C)  $3,000 
D)  $3,300

Question 14

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Accepted Answer

A)  The weather in a single geographic area represents idiosyncratic risk, which is diversifiable. 
B)  The weather in a single geographic area represents systematic risk, which is not diversifiable. 
C)  The weather in far-flung geographic areas represents systematic risk, which is not diversifiable. 
D)  The weather in far-flung geographic areas are commonly positively correlated. 
A)  The weather in a single geographic area represents idiosyncratic risk, which is diversifiable. 
B)  The weather in a single geographic area represents systematic risk, which is not diversifiable. 
C)  The weather in far-flung geographic areas represents systematic risk, which is not diversifiable. 
D)  The weather in far-flung geographic areas are commonly positively correlated.

Question 15

Explain why insurance companies usually do not offer earthquake insurance.

Accepted Answer

Insurance companies diversify their risk

Question 16

A share of an oil company can be worth $10 with a probability of 0.50 and $20 with a probability of 0.50.What is the standard deviation 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

Question 17

-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 concave. 
B)  he has diminishing 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 concave. 
B)  he has diminishing marginal utility of wealth. 
C)  he is willing to pay a premium to avoid a risky situation. 
D)  All of the above.

Question 18

Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100; otherwise it is worth $0.There is 50% chance that any variety will be retired.When Sarah buys her next stuffed animal,the expected profit is

Accepted Answer

A)  $50. 
B)  $47.50. 
C)  $45.00. 
D)  $0. 
A)  $50. 
B)  $47.50. 
C)  $45.00. 
D)  $0.

Question 19

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Accepted Answer

A) True 
 B)False

Question 20

-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.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Accepted Answer

A)  $30 
B)  $50 
C)  $70 
D)  $75 
A)  $30 
B)  $50 
C)  $70 
D)  $75

Bob invests $75 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

Why would a usury law result in banks making less credit available to low-income households?

One aspect of prospect theory is that people tend to

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

Alvin's utility function is U = W.Barry's utility function is U = W².Carl's utility function is U = W^0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?

If a person is risk averse,then she has negative marginal utility of wealth.

-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's expected wealth is

Which of the following helps to reduce risk?

Although he is very poor,Al plays the million-dollar lottery every day because he is certain that one day he will win.Al makes this calculation based upon

In terms of the stock market,systematic risk refers to the fact that

Suppose a patent applicant approaches an insurance company and seeks to purchase an insurance policy that her patent will not net $1m in the next three years.The insurance company

People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Explain why insurance companies usually do not offer earthquake insurance.

A share of an oil company can be worth $10 with a probability of 0.50 and $20 with a probability of 0.50.What is the standard deviation of the price of this share?

-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

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

-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.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

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

Bob invests $75 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

Why would a usury law result in banks making less credit available to low-income households?

One aspect of prospect theory is that people tend to

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

Alvin's utility function is U = W.Barry's utility function is U = W2.Carl's utility function is U = W0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?

If a person is risk averse,then she has negative marginal utility of wealth.

-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's expected wealth is

Which of the following helps to reduce risk?

Although he is very poor,Al plays the million-dollar lottery every day because he is certain that one day he will win.Al makes this calculation based upon

In terms of the stock market,systematic risk refers to the fact that

Suppose a patent applicant approaches an insurance company and seeks to purchase an insurance policy that her patent will not net $1m in the next three years.The insurance company

People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Explain why insurance companies usually do not offer earthquake insurance.

A share of an oil company can be worth $10 with a probability of 0.50 and $20 with a probability of 0.50.What is the standard deviation of the price of this share?

-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

Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

-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.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

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

Alvin's utility function is U = W.Barry's utility function is U = W².Carl's utility function is U = W^0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?