Question 1

Risk aversion is best explained by

Accepted Answer

A)  timidity. 
B)  increasing marginal utility of income. 
C)  constant marginal utility of income. 
D)  decreasing marginal utility of income. 
A)  timidity. 
B)  increasing marginal utility of income. 
C)  constant marginal utility of income. 
D)  decreasing marginal utility of income. D

Question 2

Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years)and has a utility function U = V1/2 (where V is the number of healthy vacation days they experience).Suppose they are not a particularly healthy family and the probability that someone will have a vacation-ruining illness (V = 0)is 20%.What is the expected value of V?

Accepted Answer

A)  10 
B)  8 
C)  2 
D)  0 
A)  10 
B)  8 
C)  2 
D)  0 B

Question 3

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%.What must the jackpot be for this to be a fair bet?

Accepted Answer

A)  10 
B)  100 
C)  1,000 
D)  10,000 
A)  10 
B)  100 
C)  1,000 
D)  10,000 C

Question 4

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Accepted Answer

A)  3 
B)  4 
C)  5 
D)  6 
A)  3 
B)  4 
C)  5 
D)  6

Question 5

An individual will never buy complete insurance if

Accepted Answer

A)  he or she is risk averse. 
B)  he or she is a risk taker. 
C)  insurance premiums are fair. 
D)  under any circumstances. 
A)  he or she is risk averse. 
B)  he or she is a risk taker. 
C)  insurance premiums are fair. 
D)  under any circumstances.

Question 6

Risk averse individuals will diversify their investments because this will

Accepted Answer

A)  increase their expected returns. 
B)  provide them with some much-needed variety. 
C)  reduce the variability of their returns. 
D)  reduce their transactions costs. 
A)  increase their expected returns. 
B)  provide them with some much-needed variety. 
C)  reduce the variability of their returns. 
D)  reduce their transactions costs.

Question 7

Expected value is defined as

Accepted Answer

A)  the profit on a fair bet. 
B)  the most likely outcome of a given experiment. 
C)  the outcome that will occur on average for a given experiment. 
D)  the relative frequency with which an event will occur. 
A)  the profit on a fair bet. 
B)  the most likely outcome of a given experiment. 
C)  the outcome that will occur on average for a given experiment. 
D)  the relative frequency with which an event will occur.

Question 8

Continuing with the family from the preceding question,what is their expected utility?

Accepted Answer

A)    
B)  .   
C)    
D)    
A)    
B)  .   
C)    
D)

Question 9

Probability is sometimes defined as

Accepted Answer

A)  the expected profit of a fair bet. 
B)  the most likely outcome of a given experiment. 
C)  the outcome that will occur on average for a given experiment. 
D)  the relative frequency with which an event will occur. 
A)  the expected profit of a fair bet. 
B)  the most likely outcome of a given experiment. 
C)  the outcome that will occur on average for a given experiment. 
D)  the relative frequency with which an event will occur.

Question 10

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

Accepted Answer

A)  2 only 
B)  3 only 
C)  2 or 3 
D)  4 
A)  2 only 
B)  3 only 
C)  2 or 3 
D)  4

Question 11

People who choose not to participate in fair gambles are called

Accepted Answer

A)  risk takers. 
B)  risk averse. 
C)  risk neutral. 
D)  broke. 
A)  risk takers. 
B)  risk averse. 
C)  risk neutral. 
D)  broke.

Question 12

With moral hazard,fair insurance contracts are not viable because

Accepted Answer

A)  individuals' aversion to risk is reduced. 
B)  insurance company's administrative costs are increased. 
C)  individuals fear unscrupulous agents. 
D)  probabilities of loss are increased over what is expected. 
A)  individuals' aversion to risk is reduced. 
B)  insurance company's administrative costs are increased. 
C)  individuals fear unscrupulous agents. 
D)  probabilities of loss are increased over what is expected.

Question 13

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
A)  1 
B)  2 
C)  3 
D)  4

Question 14

Continuing with the family from the preceding question,what is their expected utility?

Accepted Answer

A)    
B)  .   
C)    
D)    
A)    
B)  .   
C)    
D)

Question 15

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Accepted Answer

A)  No. 
B)  Yes, 3 or 4. 
C)  Yes, 4. 
D)  Yes, 4 or 5. 
A)  No. 
B)  Yes, 3 or 4. 
C)  Yes, 4. 
D)  Yes, 4 or 5.

Question 16

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Accepted Answer

A)  Yes, two days. 
B)  Yes, three days. 
C)  Yes, four days. 
D)  No. 
A)  Yes, two days. 
B)  Yes, three days. 
C)  Yes, four days. 
D)  No.

Question 17

Continuing with the same family from the preceding question,suppose a risk neutral insurance company exists to provide vacation insurance.Suppose further that each vacation day requires a constant expenditure,and this expenditure is standard across everybody.This allows us to simplify the problem by considering all payments to be in terms of vacation days.What is the least the insurance company would charge (in terms of vacation days)?

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
A)  1 
B)  2 
C)  3 
D)  4

Question 18

Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years)and has a utility function U = V1/2 (where V is the number of healthy vacation days they experience).Suppose they are not a particularly healthy family and the probability that someone will have a vacation ruining illness (V = 0)is 30%.What is the expected value of V?

Accepted Answer

A)  10 
B)  7 
C)  3 
D)  0 
A)  10 
B)  7 
C)  3 
D)  0

Question 19

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%.What must the jackpot be for this to be a fair bet?

Accepted Answer

A)  10 
B)  100 
C)  1,000 
D)  10,000 
A)  10 
B)  100 
C)  1,000 
D)  10,000

Question 20

Continuing with the same family from the preceding question,suppose a risk neutral insurance company exists to provide vacation insurance.Suppose further that each vacation day requires a constant expenditure,and this expenditure is standard across everybody.This allows us to simplify the problem by considering all payments to be in terms of vacation days.What is the least the insurance company would charge (in terms of vacation days)?

Accepted Answer

A)  3 
B)  4 
C)  5 
D)  6 
A)  3 
B)  4 
C)  5 
D)  6

Risk aversion is best explained by

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%.What must the jackpot be for this to be a fair bet?

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

An individual will never buy complete insurance if

Risk averse individuals will diversify their investments because this will

Expected value is defined as

Continuing with the family from the preceding question,what is their expected utility?

Probability is sometimes defined as

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

People who choose not to participate in fair gambles are called

With moral hazard,fair insurance contracts are not viable because

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Continuing with the family from the preceding question,what is their expected utility?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%.What must the jackpot be for this to be a fair bet?

Economic Models

Utility and Choice

Individual Demand Curves

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

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Exam 4: Uncertainty

Risk aversion is best explained by

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%.What must the jackpot be for this to be a fair bet?

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

An individual will never buy complete insurance if

Risk averse individuals will diversify their investments because this will

Expected value is defined as

Continuing with the family from the preceding question,what is their expected utility?

Probability is sometimes defined as

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

People who choose not to participate in fair gambles are called

With moral hazard,fair insurance contracts are not viable because

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Continuing with the family from the preceding question,what is their expected utility?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%.What must the jackpot be for this to be a fair bet?

Economic Models

Utility and Choice

Individual Demand Curves

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters