Question 1

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. B

Question 2

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. C

Question 3

-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. C

Question 4

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 5

A risk-preferring person is willing to pay

Accepted Answer

A)  a risk premium. 
B)  a fee to make a fair bet. 
C)  to obtain decreasing marginal utility. 
D)  None of the above. 
A)  a risk premium. 
B)  a fee to make a fair bet. 
C)  to obtain decreasing marginal utility. 
D)  None of the above.

Question 6

-Bob's utility function is shown in the above figure.He currently has $100 worth of property,but there is a 50% chance that all of it will be stolen.An insurance company offers to reimburse Bob for his loss if the money is stolen.What is the most that Bob would pay for such a policy? Explain.

Accepted Answer

A risky life leaves Bob with e

Question 7

John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000.From this,we can conclude that John

Accepted Answer

A)  is risk averse. 
B)  is risk loving. 
C)  is risk neutral. 
D)  has a negative marginal utility of wealth. 
A)  is risk averse. 
B)  is risk loving. 
C)  is risk neutral. 
D)  has a negative marginal utility of wealth.

Question 8

Describe how the risk premium for a person with a convex utility function is determined.

Accepted Answer

A person with a convex utility

Question 9

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 10

Concerning an investment project which of the following is TRUE?

Accepted Answer

A)  A risk-neutral individual is more likely to invest than a risk-averse individual. 
B)  A risk-neutral individual is more likely to invest than a risk-loving individual. 
C)  A risk-neutral individual is less likely to invest than a risk-averse individual. 
D)  Not enough information is given. 
A)  A risk-neutral individual is more likely to invest than a risk-averse individual. 
B)  A risk-neutral individual is more likely to invest than a risk-loving individual. 
C)  A risk-neutral individual is less likely to invest than a risk-averse individual. 
D)  Not enough information is given.

Question 11

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 12

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda.In this case,politicians are often engaged in

Accepted Answer

A)  the Allais effect. 
B)  the Byrd effect. 
C)  framing. 
D)  prospect theory. 
A)  the Allais effect. 
B)  the Byrd effect. 
C)  framing. 
D)  prospect theory.

Question 13

On any given day we know a salesman can earn $0 with a 30% probability,$100 with a 20% probability or $300 with 40% probability.His expected earnings equal

Accepted Answer

A)  $0. 
B)  $140. 
C)  $300. 
D)  It cannot be determined from the available information. 
A)  $0. 
B)  $140. 
C)  $300. 
D)  It cannot be determined from the available information.

Question 14

Assume the following.In location A yearly temperatures range from -30°F to 100°F and in location B yearly temperatures range from 55°F to 75°F.In both locations the average yearly temperature equals 65°F.We can conclude that

Accepted Answer

A)  temperature in location A has a higher variance. 
B)  temperature in location B has a higher standard deviation. 
C)  temperature in location A has a lower standard deviation. 
D)  temperatures in both locations have the same standard deviation but different variances. 
A)  temperature in location A has a higher variance. 
B)  temperature in location B has a higher standard deviation. 
C)  temperature in location A has a lower standard deviation. 
D)  temperatures in both locations have the same standard deviation but different variances.

Question 15

Expected value represents

Accepted Answer

A)  the actual payment one expects to receive. 
B)  the average of all payments one would receive if one undertook the risky event many times. 
C)  the payment one receives if he or she makes the correct decision. 
D)  the payment that is most likely to occur. 
A)  the actual payment one expects to receive. 
B)  the average of all payments one would receive if one undertook the risky event many times. 
C)  the payment one receives if he or she makes the correct decision. 
D)  the payment that is most likely to occur.

Question 16

For a given expected value,the smaller the standard deviation of the expected value,the larger the risk.

Accepted Answer

A) True 
 B)False

Question 17

A stock mutual fund's primary advantage is to allow

Accepted Answer

A)  investors to diversify away systematic risk. 
B)  investors to diversify away all risk. 
C)  investors to diversify away idiosyncratic risk. 
D)  the rich to avoid taxes. 
A)  investors to diversify away systematic risk. 
B)  investors to diversify away all risk. 
C)  investors to diversify away idiosyncratic risk. 
D)  the rich to avoid taxes.

Question 18

-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

Question 19

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 20

If global warming began to cause random world-wide damage to crops,insurance companies

Accepted Answer

A)  would insure against specific crop failures. 
B)  would not insure against specific crop failures. 
C)  would be indifferent between insuring or not. 
D)  would find themselves facing prosecution for ignoring the problem for so long. 
A)  would insure against specific crop failures. 
B)  would not insure against specific crop failures. 
C)  would be indifferent between insuring or not. 
D)  would find themselves facing prosecution for ignoring the problem for so long.

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

-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

One aspect of prospect theory is that people tend to

A risk-preferring person is willing to pay

-Bob's utility function is shown in the above figure.He currently has $100 worth of property,but there is a 50% chance that all of it will be stolen.An insurance company offers to reimburse Bob for his loss if the money is stolen.What is the most that Bob would pay for such a policy? Explain.

John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000.From this,we can conclude that John

Describe how the risk premium for a person with a convex utility function is determined.

One reason health insurance is very expensive is because

Concerning an investment project which of the following is TRUE?

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

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda.In this case,politicians are often engaged in

On any given day we know a salesman can earn $0 with a 30% probability,$100 with a 20% probability or $300 with 40% probability.His expected earnings equal

Assume the following.In location A yearly temperatures range from -30°F to 100°F and in location B yearly temperatures range from 55°F to 75°F.In both locations the average yearly temperature equals 65°F.We can conclude that

Expected value represents

For a given expected value,the smaller the standard deviation of the expected value,the larger the risk.

A stock mutual fund's primary advantage is to allow

-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?

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

If global warming began to cause random world-wide damage to crops,insurance companies

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

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

-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

One aspect of prospect theory is that people tend to

A risk-preferring person is willing to pay

-Bob's utility function is shown in the above figure.He currently has $100 worth of property,but there is a 50% chance that all of it will be stolen.An insurance company offers to reimburse Bob for his loss if the money is stolen.What is the most that Bob would pay for such a policy? Explain.

John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000.From this,we can conclude that John

Describe how the risk premium for a person with a convex utility function is determined.

One reason health insurance is very expensive is because

Concerning an investment project which of the following is TRUE?

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

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda.In this case,politicians are often engaged in

On any given day we know a salesman can earn $0 with a 30% probability,$100 with a 20% probability or $300 with 40% probability.His expected earnings equal

Assume the following.In location A yearly temperatures range from -30°F to 100°F and in location B yearly temperatures range from 55°F to 75°F.In both locations the average yearly temperature equals 65°F.We can conclude that

Expected value represents

For a given expected value,the smaller the standard deviation of the expected value,the larger the risk.

A stock mutual fund's primary advantage is to allow

-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?

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

If global warming began to cause random world-wide damage to crops,insurance companies

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