Question 1

Adverse selection can occur when

Accepted Answer

A)  all parties have full information. 
B)  one party has information not available to the other party. 
C)  incentives result in one party not reaching an agreement with the other party. 
D)  nobody has any information. 
A)  all parties have full information. 
B)  one party has information not available to the other party. 
C)  incentives result in one party not reaching an agreement with the other party. 
D)  nobody has any information.

Question 2

-Al works as a sales clerk at a department store for a fixed salary of $2,500 per month. He is offered a job as a salesperson at a car dealership in which there is a 50 percent chance that he will make $5,000 a month and a 50 percent chance that he will make only $1,000 a month. The figure above Al's utility of wealth curve:
a) What is Al's expected income from the offered job?
b) What is Al's expected utility from the offered job?
c) Will Al accept the offer? Why or why not?
d) What is the minimum fixed salary for which Al will continue to work for the department store and not accept the dealership's offer?

Accepted Answer

a) The probability that Al will make $5,

Question 3

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance that he could lose all his wealth, what is his expected wealth?

Accepted Answer

A)  $0 
B)  $2,000 
C)  $17,000 
D)  $18,000 
A)  $0 
B)  $2,000 
C)  $17,000 
D)  $18,000

Question 4

-Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

Accepted Answer

A)  $1,000 
B)  $2,000 
C)  $3,000 
D)  $4,000 
A)  $1,000 
B)  $2,000 
C)  $3,000 
D)  $4,000

Question 5

-Based on the table and information in the previous question, which of the following is TRUE?

Accepted Answer

A)  George prefers to make $15,000 with certainty than make the investment. 
B)  George prefers making the investment than to make $15,000 with certainty. 
C)  George is indifferent between making $15,000 with certainty and making the investment. 
D)  As the investment has risk George should not make it under any circumstances. 
A)  George prefers to make $15,000 with certainty than make the investment. 
B)  George prefers making the investment than to make $15,000 with certainty. 
C)  George is indifferent between making $15,000 with certainty and making the investment. 
D)  As the investment has risk George should not make it under any circumstances.

Question 6

Jason is a Web page designer. He estimates that this summer, he has a 0.6 probability of making $10,000 and a 0.4 probability of making only $2,000. What is Jason's expected income this summer?

Accepted Answer

A)  $12,000 
B)  $6,800 
C)  $6,000 
D)  $10,000 
A)  $12,000 
B)  $6,800 
C)  $6,000 
D)  $10,000

Question 7

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance of losing all his wealth, what is the value of insurance against this loss?

Accepted Answer

A)  $0 
B)  $2,000 
C)  $3,000 
D)  $17,000 
A)  $0 
B)  $2,000 
C)  $3,000 
D)  $17,000

Question 8

If a life insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer

Accepted Answer

A)  moral hazard problems. 
B)  adverse selection problems. 
C)  lower costs. 
D)  low demand for its product. 
A)  moral hazard problems. 
B)  adverse selection problems. 
C)  lower costs. 
D)  low demand for its product.

Question 9

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected utility?

Accepted Answer

A)  100 
B)  90 
C)  50 
D)  zero 
A)  100 
B)  90 
C)  50 
D)  zero

Question 10

Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease

Accepted Answer

A)  by more than 300. 
B)  by less than 300. 
C)  by 300. 
D)  by some amount that cannot be determined without more information. 
A)  by more than 300. 
B)  by less than 300. 
C)  by 300. 
D)  by some amount that cannot be determined without more information.

Question 11

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected utility of wealth?

Accepted Answer

A)  between 0 and 200 
B)  245 
C)  270 
D)  between 287 and 300 
A)  between 0 and 200 
B)  245 
C)  270 
D)  between 287 and 300

Question 12

One of the ways the market for used cars copes with the problems associated with private information is through the offering of

Accepted Answer

A)  leases. 
B)  warranties. 
C)  low interest rates. 
D)  low prices. 
A)  leases. 
B)  warranties. 
C)  low interest rates. 
D)  low prices.

Question 13

Stan, who is risk averse, can invest in project A or project B. Project A returns $3,000 with probability 1/2 and $9,000 with probability 1/2. Project B returns nothing with probability 1/2 and $12,000 with probability 1/2. For Stan, project A has

Accepted Answer

A)  greater expected wealth and greater expected utility than project B. 
B)  lower expected wealth and lower expected utility than project B. 
C)  the same expected wealth and the same expected utility as project B. 
D)  the same expected wealth but higher expected utility than project B. 
A)  greater expected wealth and greater expected utility than project B. 
B)  lower expected wealth and lower expected utility than project B. 
C)  the same expected wealth and the same expected utility as project B. 
D)  the same expected wealth but higher expected utility than project B.

Question 14

For a risk-averse individual, as wealth increases, total utility

Accepted Answer

A)  increases at a decreasing rate. 
B)  increases at a constant rate. 
C)  increases at an increasing rate. 
D)  is constant. 
A)  increases at a decreasing rate. 
B)  increases at a constant rate. 
C)  increases at an increasing rate. 
D)  is constant.

Question 15

-Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

Accepted Answer

A)  option A: $300 with certainty. 
B)  option B: 50 percent chance of $200 and 50 percent chance of $400. 
C)  option C: 50 percent chance of $200 and 50 percent chance of $700. 
D)  option D: 90 percent chance of $400 and 10 percent chance of $0. 
A)  option A: $300 with certainty. 
B)  option B: 50 percent chance of $200 and 50 percent chance of $400. 
C)  option C: 50 percent chance of $200 and 50 percent chance of $700. 
D)  option D: 90 percent chance of $400 and 10 percent chance of $0.

Question 16

For a risk averse person, the marginal utility of wealth

Accepted Answer

A)  decreases as wealth increases. 
B)  increases as wealth increases. 
C)  decreases as wealth decreases. 
D)  remains constant as wealth increases. 
A)  decreases as wealth increases. 
B)  increases as wealth increases. 
C)  decreases as wealth decreases. 
D)  remains constant as wealth increases.

Question 17

-Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy's expected annual income from real estate brokerage is

Accepted Answer

A)  $39,000. 
B)  $42,500. 
C)  $33,000. 
D)  $47,500. 
A)  $39,000. 
B)  $42,500. 
C)  $33,000. 
D)  $47,500.

Question 18

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is

Accepted Answer

A)  $10,000. 
B)  $20,000. 
C)  $30,000. 
D)  $40,000. 
A)  $10,000. 
B)  $20,000. 
C)  $30,000. 
D)  $40,000.

Question 19

Life insurance companies often give applicants a physical examination to prevent

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  signaling. 
D)  warranties. 
A)  moral hazard. 
B)  adverse selection. 
C)  signaling. 
D)  warranties.

Question 20

There is a growing market for buying and selling information about the online behavior of consumers. Most people use one of only a small number of search engines (such as Google, Bing, or Yahoo!) when surfing the net. It has been hard for new search engines to gain any market share. Based only on this information, the market for search is best considered as

Accepted Answer

A)  perfectly competitive. 
B)  oligopoly. 
C)  monopolistically competitive. 
D)  monopoly. 
A)  perfectly competitive. 
B)  oligopoly. 
C)  monopolistically competitive. 
D)  monopoly.

Adverse selection can occur when

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance that he could lose all his wealth, what is his expected wealth?

-Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

-Based on the table and information in the previous question, which of the following is TRUE?

Jason is a Web page designer. He estimates that this summer, he has a 0.6 probability of making $10,000 and a 0.4 probability of making only $2,000. What is Jason's expected income this summer?

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance of losing all his wealth, what is the value of insurance against this loss?

If a life insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected utility?

Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease

One of the ways the market for used cars copes with the problems associated with private information is through the offering of

Stan, who is risk averse, can invest in project A or project B. Project A returns $3,000 with probability 1/2 and $9,000 with probability 1/2. Project B returns nothing with probability 1/2 and $12,000 with probability 1/2. For Stan, project A has

For a risk-averse individual, as wealth increases, total utility

-Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

For a risk averse person, the marginal utility of wealth

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is

Life insurance companies often give applicants a physical examination to prevent

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters

Exam 20: Uncertainty and Information

Adverse selection can occur when

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance that he could lose all his wealth, what is his expected wealth?

-Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

-Based on the table and information in the previous question, which of the following is TRUE?

Jason is a Web page designer. He estimates that this summer, he has a 0.6 probability of making $10,000 and a 0.4 probability of making only $2,000. What is Jason's expected income this summer?

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance of losing all his wealth, what is the value of insurance against this loss?

If a life insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected utility?

Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease

One of the ways the market for used cars copes with the problems associated with private information is through the offering of

Stan, who is risk averse, can invest in project A or project B. Project A returns $3,000 with probability 1/2 and $9,000 with probability 1/2. Project B returns nothing with probability 1/2 and $12,000 with probability 1/2. For Stan, project A has

For a risk-averse individual, as wealth increases, total utility

-Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

For a risk averse person, the marginal utility of wealth

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is

Life insurance companies often give applicants a physical examination to prevent

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters